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ANALYSIS-Baltic woes to weigh further on Swedish crown

Forex Mar 13, 2009 10:32AM ET
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By Jessica Mortimer and Niklas Pollard

LONDON/STOCKHOLM, March 13 (Reuters) - The Swedish crown will tumble to new record lows past 12 euros per crown should fresh bad news emerge from the shaky Baltic states to which Sweden's banks are dangerously exposed.

Moody's ratings agency last Thursday warned of a "significant threat" to Sweden's banking sector from exposure to the nose-diving economies of Latvia, Lithuania and Estonia, sending the crown to a record low of 11.7860 to the euro.

Although the currency staged a strong recovery this week in tandem with equity market gains, any hint of potential Baltic state defaults or the abandonment of their currency pegs to the euro will hit the crown hard.

"I think people, especially abroad, have worries about Swedish banks' exposure to the Baltics, and used the crown as a kind of proxy to speculate against these countries being forced to devalue," SEB currency analyst Johan Javeus said.

The Bank for International Settlements estimated Swedish banks' claims on Estonia at $29.87 billion, on Latvia at $23.017 billion and on Lithuania at $27.426 billion. Analysts estimate these claims account for around 20 percent of Sweden's GDP. (for a link to the BIS report see

Massive expansion by Swedish banks over the past decade into eastern Europe, mainly into the Baltics, fuelled a lending boom in the region, but these countries now face a deep recession and are struggling to maintain their currency pegs.

"We're talking about a hit in the event of default of anything between 2 and 5/6 percent of GDP," Bank of New York Mellon currency strategist in London Simon Derrick said.

"That is a huge negative impact. Does that mean the Swedish crown could weaken further? Yes, is the simple answer," he said.

The market's perception of this risk has been shown as Latvian credit default swaps (CDS) -- an indicator of the cost of insuring against sovereign default -- hit a record high on a 5-year basis on Wednesday, implying a better-than-even chance of Latvia defaulting.

Latvia's prime minister-designate Valdis Dombrovskis has warned several times that his country faces bankruptcy unless it gets more funds from the International Monetary Fund and the European Union, and that it could run out of money in June..


Most analysts feel that the Swedish crown has been oversold and believe it is undervalued in the long term, but they say it remains vulnerable to further falls in the short to medium term.

"Without any clear signs that global growth is about to turn upwards, there is really nothing preventing the krona from falling further -- suffice to say the prospects are very insecure in the short term," Swedbank currency analyst Karl-Johan Bergstrom said.

He added, however, that he sees long-term fair value for the crown at around 10 per euro and 8.5 per dollar.

There are also concerns about Sweden's status as a small export-based economy during a time of global recession.

"Sweden is in a fair amount of trouble as it is a small, open economy that is hugely dependent on global demand, with exports of goods and services accounting for around 50 percent of GDP," Banc of America Securities-Merrill Lynch economist Matthew Sharratt said.

In the fourth quarter, Swedish gross domestic product contracted by 4.9 percent year-on-year, while data on Wednesday showed Swedish industrial orders plunged by over 30 percent in January from a year earlier.

Aggressive monetary easing has been another factor in the crown's decline, with rates falling from 4.75 percent in early October down to a record low 1 percent last month. More cuts are expected, with unconventional measures a distinct possibility.

"The risks are greater that we will see another high (for the euro against the Swedish crown) than that the recent high will mark the peak," SEB technical currency strategist Dag Muller said.

But some analysts are less fearful of the Baltic risks.

Banc of America Securities-Merrill Lynch's Sharratt said the Baltic issue -- while worrying -- may not be as serious an issue as the market fears, given that exports to eastern Europe only made up around 10 percent of total Swedish exports.

Others feel that the Swedish crown has fallen so far already that many of the risks -- such as the Baltic countries abandoning their currency pegs -- are now priced in.

"I think a sizeable part of that scenario (abandoning the pegs) has already been priced in at current levels," Danske analyst Stefan Mellin said. (Reporting by Jessica Mortimer in London and Niklas Pollard in Stockholm; Editing by Andy Bruce)

ANALYSIS-Baltic woes to weigh further on Swedish crown

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