VZCZCXRO3937
OO RUEHIK
DE RUEHSM #0632/01 2800522
ZNR UUUUU ZZH
O 070522Z OCT 09
FM AMEMBASSY STOCKHOLM
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4778
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 02 STOCKHOLM 000632 
 
SENSITIVE BUT UNCLASSIFIED 
 
SIPDIS 
 
E.O. 12958:N/A 
TAGS: EFIN ECON ECIN PGOV SW
SUBJECT: SWEDISH GOVERNMENT PUBLICALLY PRESSURES LATVIAN GOVERNMENT 
 
STOCKHOLM 00000632  001.2 OF 002 
 
 
 
¶1. (U) Summary:  Swedish officials publicly chastised the Government 
of Latvia for its inability to present a 2010 budget that would 
satisfy IMF and EU conditions during the annual IMF meeting this 
weekend. Swedish Prime Minister Fredrik Reinfeldt and Finance 
Minister Andres Borg warned Riga that next disbursements of the aid 
to rescue the Latvian economy will be jeopardized if Latvian 
authorities fail to follow through on promises made to lenders. 
Latvian Prime Minister Valdis Dombrovskis called the comments 
unhelpful while Swedish banks reiterated their commitment to stay 
the course in Latvia. End Summary. 
 
¶2. (U) The Latvian government in July renegotiated the original 
terms of the $10.5 billion rescue package agreed upon on in December 
2008 and committed to reduce the 2010 budget deficit to 10 percent 
by cutting spending by $1 billion in 2010 to secure the second 
tranche of the aid package, to which Sweden is third largest 
contributor after the EU and the IMF. Prime Minister Dombrovskis on 
20 September, however, presented a 2010 budget outline that 
effectively acknowledged that the government will not comply with 
its IMF and EU commitments. 
 
¶3. (U) Swedish Finance Minister Anders Borg increased the pressure 
on the Latvian government by stating publicly that it will be very 
difficult to secure the continued support of other lenders "if the 
Latvians don't even live up to what they promised."  "You can simply 
not behave like this," Borg said. Swedish Prime Minister Fredrik 
Reinfeldt echoed Borg's comments and expressed publically his 
displeasure with the Latvian government's lack of commitment to 
follow through.  "If you make a deal to get a hold on the Latvian 
economy, then the Latvian Government has to make sure to do its part 
of the bargain," Reinfeldt said and at the same time warned that 
"the cuts are preconditions for (Sweden) to make the payments and 
that "the IMF will also have issues with this." 
 
¶4.  (U) The Latvian Prime Minister Valdis Dombrovskis responded by 
calling these comments "unhelpful" and added that the Latvian 
government is trying to avoid saving for the sake of saving alone. 
"I have heard no credible economic analysis behind the comments by 
Borg," Dombrovskis said.  Despite the concerns, Dombrovskis 
reiterated that Riga will meet the deficit goal (of no more than 10 
percent of GDP in 2010 and 8.5 percent the following year) despite 
smaller cuts and questioned the economic reasons that would justify 
Borg's comments. He expressed his disillusionment by adding: "I have 
held negotiations with the IMF and the European Commission and they 
have not even been close to show the same level of aggressiveness as 
Borg." 
 
Swedish banks not concerned, prepared for all possible outcomes 
----- -------- ------ -------- ----- 
 
¶5. (U) Despite the concern expressed by Reinfeldt and Borg, major 
Nordic banks have not publically echoed the Swedish government's 
concerns.  "There are now ongoing negotiations on the third part of 
the IMF support-package and these recent statements should be viewed 
in the light of that," said Thomas Backteman, Director of 
Communications at Swedbank. Backteman noted that "we have continuous 
contacts with Swedish authorities and politicians." Backteman 
emphasized that "(Swedbank's) strategy is to be prepared for all 
possible outcomes and that "no EU member will be allowed to cancel 
its payments."  "Latvia has not had reason to change over the last 
couple of days," according to Backteman." Vivika Hirdman-Ryrberg, 
Head of Communications at SEB, mirrored Backteman's comments and 
emphasized publically  the Swedish banks' joint declaration in 
September to continue its long-term commitments in the region. 
Similarly, Nordea's Helena Vsterman, Chief Press Officer, said that 
there appears to be no reason for concern and that "there are no 
reasons for changing (Nordea's) strategy in the Baltic region.  For 
us there are no greater reasons for concern now than it was 
earlier." 
 
 
¶6.  (U) In contrast, the Stockholm Business Daily Newspaper Dagens 
Industri reported that the situation is far worse than it seems. 
Alf Vanags, Director at the Baltic International Centre for Economic 
Policy Studies, commented that "Anders Borg's and the IMF's views 
[on the current situation] are far worse than they want to admit 
publicly.  The current situation in Latvia is that the government is 
not capable of agreeing on anything."  He added that "(he) has long 
believed that the way out of this situation, and it would be a good 
way, would be to change the exchange rate.  That would give the 
government authorities room to act." 
 
Comment 
------- 
¶7.  (SBU) Comment:  We think this sudden public breach is more a 
signal to the Latvian government than a sign of Swedish plans to 
withdrawal of support for Latvia's current economic stabilization 
program. Swedish Finance Ministry officials, and Swedish bankers, 
have repeatedly told us of their close cooperation with Latvian 
 
STOCKHOLM 00000632  002.2 OF 002 
 
 
counterparts. The banks have assured us they intend to stay in 
Latvia for the long haul to expand their market share, and that they 
view the Baltics as their home market. The criticism consistently 
voiced to us by Finance Minister Borg, and his State Secretaries Per 
Jansson and Matts Odell is that because of the "political 
philosophy" of the "neoconservative" Latvian government they are 
choosing the painful course of an international devaluation rather 
than adjusting their currency, and they are attempting the entire 
adjustment through severe budget cuts rather than tax increases. 
Since July, Swedish officials have questioned whether Latvia's plans 
were sustainable, with Finance Minister Borg telling us the chance 
of a devaluation by year-end were 50-50. 
 
¶8.  (SBU) Comment continued: A lats devaluation would result in 
accelerated, but manageable, loan losses for those Swedish banks 
with significant exposure to Latvia. The risks the Latvian economy 
poses to Swedish banks became evident shortly after Borg and 
Reinfeldt's comments during the October 5 trading session as SEB and 
Swedbank stocks fell by 4 and 2 percent, respectively. Post will 
follow up with our contacts and report more via septel. End comment. 
 
 
BARZUN