June 17 (Bloomberg) -- Sweden is ready to “deal with” a Latvian economic deterioration that would leave Swedish banks in the Baltic region struggling, Finance Minister Anders Borg said.

“There are serious risks,” Borg said in an interview in Berlin yesterday. “We have made clear that we have the resources and the ability to deal with any problem that might occur. We could deal quite forcefully if necessary.”

Sweden’s banks are the Baltics’ biggest and Fitch Ratings estimates they face loan losses from the region that may cost Sweden 5 percent of gross domestic product to absorb. Latvia’s parliament last night passed budget cuts of $1 billion, equal to 10 percent of spending, to help unlock a 1.7 billion-euro ($2.4 billion) tranche from a group led by the European Commission and the International Monetary Fund.

While the budget cuts will keep loan funds flowing and avert a lats devaluation, they will exacerbate Latvia’s recessions, the European Union’s steepest. Swedbank AB and SEB AB, the largest banks in the Baltics, have loaned more than 366 billion kronor ($48 billion) there, respectively 17 percent and 13 percent of total loans.

“If there would be credit losses that would undermine their capital, we’ve made clear that we are ready to provide capital for common stocks to safeguard the taxpayers’ interests and recapitalize the banks,” Borg said. “If there would be huge losses we would be ready to take over banks. But the first responsibility lies with private owners.”

Devaluation

The economy of Latvia, which pegs the lats to the euro, contracted 18 percent in the first quarter. The budget includes pay cuts as deep as 20 percent and 10 percent pension reductions, undermining households’ and businesses’ ability to service debt.

Before passing the budget cuts, some investors were concerned Latvia may be forced to devalue the lats as a way to keep exports competitive and sustain its economy, in the absence of bailout funds.

Still, bank losses will be the same by “the end of the cycle,” whether Latvia devalues or not, Fitch Ratings analyst Alexandre Birry said yesterday.

“Our first principle is to safeguards taxpayers’ interests,” Borg said. “Our second principle is to safeguard taxpayers’ interests and our third principle is to safeguard taxpayers’ interests. So we will not spend excessive money to bail out bank owners. We will deal with them in an appropriate manner.”

Sweden’s krona is the worst-performer against the euro this month of the 16 major currencies tracked by Bloomberg, having lost 3.4 percent. The krona slid to a record low against the euro on March 6 after Standard and Poor’s cut Latvia’s credit rating to junk on Feb. 24.

Worst Case

Swedish banks will have to write down 170 billion kronor this year and next, the central bank estimates in its main scenario, with the Baltic accounting for almost 40 percent of that. In a worst case scenario, loan losses could reach 300 billion kronor, the bank said.

Sweden’s Riksbank on May 27 said it would bolster reserves by 100 billion kronor. It said on June 10 it will borrow 3 billion euros from the European Central Bank to safeguard financial stability.

The government injected 50 billion kronor in capital to support its lenders and loaned 10 billion kronor to Latvia, to be paid in 2010. That, plus the economic stimulus, account for 30 percent of Sweden’s estimated 200 billion-krona deficit in 2009 and 2010.

To contact the reporters on this story: Tasneem Brogger in London at tbrogger@bloomberg.net Brian Parkin in Berlin at bparkin@bloomberg.net

Last Updated: June 17, 2009 02:32 EDT