Latvia: Big Swedish banks strangle Latvian economy

European Union fear acute political crisis

Every day, it becomes more clear who is strangling the Latvian economy: Sweden’s finance minister, Anders Borg, on behalf of the big Swedish banks. Behind them is the European Union, which during the finance ministers’ summit in Gothenburg, on 3 October, put harsh ultimatums to the Latvian government.

"Latvia must deliver on its commitment to slash 2010 spending by 500 million lats, Swedish Finance Minister Anders Borg said on Sunday, noting international patience with the Baltic state was limited", Reuters news agency reported. Borg was in charge of the EU finance summit because Sweden holds the EU rotating presidency. The EU demands "the promised cuts to be implemented when the new Latvian budget is presented by the end of October".

In whose interest is Borg acting? The Swedish daily, Svenska Dagbladet, reported last Saturday that Borg had "contacted the top managers in big banks and warned of an acute political crisis in Latvia. Something that in turn can lead to both a devaluation and eventually a default. In other words, a kind of state bankruptcy".

Three Swedish banks, Swedbank, SEB and Nordea, lent 131 billion Swedish krona (12.5 bn euros) to private companies and households in Latvia. The Swedish government demands bigger cuts in Latvia, to avoid a devaluation of the Latvian currency, the lats, which is pegged to the euro. A devaluation of the lat would multiply bank debts and could lead to a wave of devaluations in Eastern Europe. The latter, followed by increased political instability, is a nightmare prospect for the EU.

The strangle grip that Sweden holds over Lativa, however, will only deepen the crisis in Latvia, where the economy is expected to shrink by a dramatic 18 % this year. Workers, pensioners, school students and the growing number of unemployed have already paid heavily:

  • Food sales dropped in Latvia by 23.2 % in August compared to same month in 2008. Total retail sales fell by more then 30 %
  • Official unemployment is now 18 %, the second highest in the EU
  • 70 % of companies say they have cut wages. State employees have lost 15-20 % of their wages
  • Half of all hospitals have been closed down, as well as many schools

In December, last year, the EU, Sweden and the International Monetary Fund agreed to a "rescue package" of 7.5 billion euros. The lenders’ most recent demands for further cuts came after the Latvian government "only" made 225 million lats in cuts (320 million euros) in the proposed budget for 2010. The demanded 500 million lats is equivalent to more than 10 % of the state budget, in addition to cuts already made. Without these cuts, the state deficit would be around 10 % of GDP, still less than, for example, Britain or the US.

A protest movement last February caused the government to step down. Now the biggest party ion the present coalition, the ’Peoples Party’, close to nil in opinion polls, hesitates to make new huge cuts. "The target to cut 500 million lats is, in practice, impossible without terminating several branches of the economy", the party spokesman, Vents Armands Krauklis, said last week. This party obviously tries to defend its own position, not working people.

When the Latvian parliament voted against a property tax, the IMF’s reponse was to advocate a currency devaluation, dropping the peg to the euro. That is why the EU and the Swedish government defend the Swedish banks, the same banks that caused the crisis in the first place. In fact, the bonuses of the Swedish bank managers this year, 510 million euros, is not far from covering the cuts demanded in Latvia.

A devaluation now seems almost inevitable. But a devaluation would be just another means from European and Latvian capitalists to make workers and the poor pay for the crisis. This in a situation with new reports of corruption and political scandals. For example, during last year’s nationalisation of Parex bank cost the equivalent of 37 % of the country’s tax incomes.

Latvia is in acute need of a fighting and truly socialist party for workers and poor – a party that can organise struggle against Swedish, foreign and Latvian capital, at the same time as finding allies among workers from all over Europe.