June 4 (Bloomberg) -- Sweden’s government can handle a possible bank collapse, or nationalization, sparked by the economic collapse in the Baltic states, Finance Minister Anders Borg said.

“For Sweden, this means that there is a significant risk of loan losses at the banks,” Borg told Swedish television broadcaster SVT in an interview last night, following a failed Latvian Treasury bill auction for 50 million lati ($100 million). Still, Sweden can weather the fallout of loan losses in the Baltics, he added.

The Baltic state’s failure to sell debt on market terms sparked concern amongst some investors that Latvia may be heading toward a default that would precipitate a devaluation of the lats as the government waits for the next tranche of an international bailout. The central bank today released a statement reiterating plans to maintain the lats peg until the country adopts the euro.

The failed Treasury bill auction sparked a 16 percent decline in shares of Stockholm-based Swedbank AB, the biggest bank in the Baltic states. SEB AB, the second biggest lender in the region, dropped 11 percent, while Nordea AB decreased 5.2 percent. Those declines contributed to a 3.1 percent slump in Sweden’s benchmark index.

The coalition government is planning budget cuts so it can receive the next tranche of its loan from a group led by the European Commission and the International Monetary Fund. Prime Minister Valdis Dombrovskis said yesterday the country, which is a member of the pre-euro exchange rate mechanism, will adopt the single currency in 2013 at the earliest, compared with an earlier target of 2012.

‘Primary Concern’

“Our primary concern is to reach an agreement with international lenders to get this loan program on track,” said Dombrovskis, in an interview on CNBC last night.

“The probability that Latvia gets the next loan transfer is fairly high and should ease some concern,” said Kenneth Orchard, a vice president and senior analyst at Moody’s Investors Service in London. “The rational for devaluation has diminished,” according to Orchard. Though “expectations of a devaluation can sometimes be self-fulfilling.”

The country’s current account deficit has narrowed to 348 million lati in the fourth quarter after peaking at 960 million lati in the middle of 2007. That’s reducing pressure on the currency, according to Orchard.

Another Auction

The Baltic country’s Treasury is planning another bill auction today. Latvia’s currency, the lats, strengthened 0.3 percent today as of 12:34 p.m. local time after the Treasury and other market participants bought the currency, said Kristaps Strazds, head of trading at SEB AB’s Latvian unit.

The country runs a quasi-currency board that allows the lats to move 1 percent around a midpoint against the euro.

The Latvian central bank said today it is an independent institution responsible for the lats exchange rate, adding that the rate will remain stable until the lats is replaced by the euro.

Latvia turned to a group led by the IMF and EU for a 7.5 billion euro ($10.7 billion) bailout after its economy contracted by 10.3 percent in the fourth quarter and the state took over the second-biggest bank. The agreement calls for Latvia to keep its currency peg to the euro and restore competitiveness through wage and spending cuts.

An agreement is needed “quickly” in “coming days or in the first half of next week,” Dombrovskis said, and “will calm this situation down. This is not the first panic we have had with the devaluation of the lats.”

Liquidity

The absence of bids at the auction comes after a liquidity shortage for lati helped drive up the overnight lending rate to a record 16.4 percent, asking prices show. The central bank has bought about 1.3 billion lati since the beginning of 2008, removing them from circulation and creating a market shortage of the currency.

Sweden’s banks can cope with a rise in loan losses in excess of those assumed in a main scenario for this year and next, the country’s central bank said.

Loan losses will total 170 billion kronor ($22.8 billion) this year and in 2010, the Stockholm-based Riksbank estimates in its main scenario. Lenders are “well-capitalized in an international comparison,” the bank added.

Almost 40 percent of Latvia’s population of 2.3 million people are customers with Swedbank, which controls about a quarter of the lending market in Latvia. The Swedish bank, which has 900,000 private clients and 59,000 corporate customers in the Baltic country, has lent 65 billion kronor in Latvia. In the fourth quarter, Swedbank had loan losses and made provisions for future losses on 3.7 percent of its loan portfolio in Latvia.

SEB has total lending of 39 billion kronor in Latvia, where the Swedish bank made an operating loss of 559 million kronor in the first quarter after setting aside 684 million kronor for loan losses and provisions for future losses on bad credit.

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

Last Updated: June 4, 2009 06:42 EDT