Friday, 29 May 2009

Latvians aren't shopping and Swedish banks are worried

As reported in the FT Alphaville column there is a bleak note issued by Danske Bank on May 28th regarding the Baltic states - Lithuania, Latvia and Estonia.
All three states are possible sovereign default cases and a graphic in the Danske Bank report shows the alarming drop off in retail sales year on year including 25% drops for Latvia and Estonia.

Two sections of the report are worth quoting
The event risk has risen sharply in the Baltic markets and we advise utmost caution.
Yesterday, the Swedish central bank Riksbanken said it will increase its currency reserve by SEK 100 bn through a loan from the Swedish debt agency. Investors seem to believe that this is a buffer to deal with potential problems arising from the Baltic crisis.

With worries over the Baltic situation on the rise there is a significant risk of negative spill-over to other markets in CEE. Therefore we see clear downside risk on the CEE currencies and a risk of a sharp sell-off in the CEE fixed income markets in the coming days. We especially see value in buying USD/HUF,(Hungarian Forint) but potentially also USD/PLN (Polish zloty) on an escalation of the Baltic crisis.
As noted here recently in regard to other potentially unpleasant possibilities, one cannot but wonder how much the capital markets have "discounted" the possibility of an EU member state defaulting.

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