June 5 (Bloomberg) -- Swedbank AB, the largest bank in the Baltic states, is prepared for a potential currency devaluation in Latvia, Chief Executive Officer Michael Wolf said.

“We feel comfortable about our action preparedness regardless of which way the Latvian government chooses to go,” Wolf wrote in a statement on the Stockholm-based bank’s Web site late yesterday.

Latvia’s central bank pledged to defend its currency’s peg to the euro yesterday after some investors shunned assets linked to the Baltic nation on concern its economic collapse will precipitate a devaluation of the lats. Latvia, in the midst of the severest recession in the European Union, is struggling to reduce its budget gap and ensure the continued payment of an international bailout.

The “challenges” for the Latvian population will be “substantial” and Swedbank’s customers’ payment capacity will be “under pressure” regardless of whether Latvia’s government devalues the currency or not, Swedbank said in the statement.

Latvia plans to cut spending and implement reforms that include closing some hospitals and schools so it can receive transfers from a 7.5 billion-euro ($10.6 billion) loan from a group led by the European Commission, the International Monetary Fund and Sweden. The IMF delayed a 200 million-euro transfer in March when the budget was not cut.

Krona Under Pressure

“It’s not given that an external devaluation, over a longer period of time, will lead to larger credit losses for the banks,” Swedbank said. “But an external devaluation would give bigger credit losses during a shorter period of time as it directly hits the payment capacity for the many customers who have loans in euros.”

Swedish banks including Swedbank, SEB AB and Nordea AB made many loans in Latvia in euros, while customers in the country earn wages in the local currency. A devaluation would make it harder for many Latvians to repay debt.

Swedbank shed 5.7 percent to 36.70 kronor in Stockholm. SEB, the second-largest bank in the Baltics, fell 1 percent to 29.20 kronor.

Latvia’s economic crisis and speculation that it may be forced to devalue its currency has put pressure on Sweden’s krona because of the banks’ loans in the Baltic state.

The krona slipped 1.8 percent to 7.6937 against the dollar from 7.6316, for a weekly decline of 1.9 percent.

Latvia’s central bank buys and sells foreign-currency reserves to prevent the lats from fluctuating more than 1 percent on either side of 0.702804 per euro and is “responsible” for keeping the current exchange rate until the lats is replaced by the euro, the bank has said.

To contact the reporter on this story: Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net

Last Updated: June 5, 2009 12:07 EDT