A Tale of Two Banks and a Baltic Economy That's Toughened Up

(Bloomberg) -- A decade ago, Latvia’s No. 2 lender collapsed under the weight of a global crisis that sank the Baltic nation’s red-hot property market and shut off access to credit.

The fallout wasn’t pretty: the economy shrank by a fifth, unemployment spiked and brutal austerity linked to the bank’s rescue contributed to a 10 percent plunge in the population.

Fast forward to today and observers could be forgiven for thinking the same scenario is about to play out -- the European Central Bank has just shut down the country’s third-biggest lender, ABLV Banka AS, amid swirling accusations of money laundering.

But the two banks are vastly different, which works in Latvia’s favor this time as citizens’ savings aren’t in jeopardy. And the economy is also far more robust, meaning it should be able to weather any adverse effects. These three charts show how.

Client Focus

Parex Banka’s 2008 demise followed a run on deposits by Latvian savers. Bailing it out required 1.7 billion euros ($2.1 billion) of liquidity, additional capital and other support, provided by a group led by the European Union and the International Monetary Fund. In contrast, ABLV’s holdings are predominantly from foreign clients, limiting the potential hit to the nation’s deposit-insurance system. In fact, regulators say the fund won’t be required at all this time round.

Balanced Economy

Unlike the breakneck growth that preceded Latvia’s 2008 bust, the economy is currently expanding at an annual clip of about 4 percent. What’s more, imbalances such as rampant inflation and a gaping current-account deficit are absent. “The potential fiscal costs for the government will be modest and the banking system’s financial stability will endure,” according to S&P Global Ratings.

No Panic

Unlike when Parex went under and sovereign bond yields spiked beyond 10 percent, investors aren’t fretting unduly this time round. “There was some minor impact with spreads widening slightly, but the market doesn’t consider the problem big enough to materially affect Latvian credit quality,” Anton Hauser, a money manager at Erste Asset Management in Vienna who owns Latvian bonds in portfolios he manages, said by email. “Without further negative news, I expect the market reaction to remain small and spreads to tighten relatively quickly.”

--With assistance from Milda Seputyte and Marton Eder

To contact the reporter on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net.

To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, Andrew Langley, Paul Abelsky

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