SSE.LT

Swedbank and Latvia are major friends today. If you listen to someone speaking about Latvia just wait a few moments and you will enjoy expressions about Swedbank. Or other way, if someone is articulating about Swedbank, she will certainly stick few words about Latvia. Causality is uncertain but base is obvious: Swedbank and Latvia are major problems of each other. Latvian currency is losing value, Swedbank – confidence.

Latvian Lat forward rate first time since SMS-bank-run has been rising so sharply. Since September the 12 month forward LVL depreciated 1.5% to 0.7332. Official fixed rate of LVL to EUR is 0.702804 plus/minus 1%, implying upside limit of 0.709832 – exactly the level reached last week – 3.2% below forward rate. If the trend continues, the market would demand two things: Latvian Central Bank to protect the currency, Swedbank to pay on debts. If one of the those fails, both will face serious problems. Including both Estonia and Lithuania.

Fortunately for some, Latvian Central Bank started its intervention into market. Not loudly, not to wake nuts, but slowly selling Euro and reducing local money supply. As an evidence, see recent numbers on Latvian reserves outstanding, which have fallen already 6% from their maximum amount since June, 2008.

Well, the doing is right, but is it sustainable? The time will show, but the market has started doubting. Either it did regarding Swedbank credibility. Both shares and bonds prices plunged this year, with a major downside move in September.

Investors are worried about worsening business in Latvia and Baltic States in general, our Central Banks willingness to support EEK, LVL and LTL, and worsening macro conditions of the region. But mostly their fears are driven by Swedbank’s huge debt repayment, approaching in January 2009.

The bank is liable for USD 5.5bn debt repayment in 4Q 2008 and USD 15bn in 1Q 2009 – 37% of total debt. Its expected free earning for the coming half of the year are reaching roughly USD 2.5bn. In the base case scenario it should attract USD 18bn of capital until Christmas time. To make matters worse, add potential USD 1.4bn loss from Lehman Brothers and extreme 179bp CDS spread, and the general picture is becoming clear.

Both Latvian Central Bank and Swedbank seem to be in trouble. Interrelated, deep, stinky trouble. It doesn’t matter who will be first, what matters is “when” and how much to short. Any bets?