June 5 (Bloomberg) -- Sweden won’t offer Latvia a bilateral loan beyond the Nordic country’s contribution to an international bailout, Finance Minister Anders Borg said, adding the Baltic state’s government must rein in its budget gap.

“They have to show that they have control over their public finances,” Borg told reporters at a meeting in Stockholm today. It is of “utmost importance” that Latvia take “concrete and well-defined” additional measures to limit its public deficit to ensure that the International Monetary Fund and the European Commission resume loan payments.

Latvian Prime Minister Valdis Dombrovskis pledged today to push through budget cuts and ensure the inflow of international loan payments as speculation grows the country may devalue its currency. Economic turmoil in Latvia, Lithuania and Estonia is threatening to hamper recovery in Sweden, whose banks are struggling to contain losses in the Baltic region.

It is “obvious” that Latvia’s crisis will have an effect on Sweden’s economic development, Borg said.

Sweden’s krona lost as much as 1.3 percent against the euro today on concern that Stockholm-based Swedbank AB and SEB AB, the biggest banks in the three Baltic states of Latvia, Lithuania and Estonia, will be forced to write off debt in the European Union’s worst performing economies.

“It is important that we together, not least during our EU presidency,” which starts on July 1, “try to ensure that we get a good solution in Latvia, partly because there is a risk that this will spread,” Borg said.

Bailout

Latvia was granted a 7.5 billion euro ($10.7 billion) bailout from the IMF and the European Commission in December. Sweden has set aside 10 billion kronor ($1.3 billion) for a loan to Latvia that will be paid out next year as part of the IMF and EU bailout. The Nordic country has earlier said it won’t consider an earlier disbursement.

Latvia’s economy contracted 18 percent last quarter, more than any other EU member, as the government struggles to slash budget spending to keep its bailout funds flowing. The currency will not be devalued and Latvia will pass budget cuts needed to get the next tranche of money, Dombrovskis said today.

Latvia’s parliament last night agreed on a 9.2 percent budget deficit of gross domestic product in the first of two readings. The legislature will cut spending in the second reading and adopt amendments on June 17 to receive disbursement from the IMF.

Latvia’s bailout plan initially called for a budget deficit of 5 percent, though the Baltic country said it would ask for a shortfall of 7 percent after projections for its economic contraction were revised down.

Sweden’s Swedbank AB, the largest bank in the Baltics, and SEB AB, the second-largest, have together made loans of more than 366 billion kronor in Estonia, Latvia and Lithuania. Loan losses are soaring at the banks, with speculation that Latvia may devalue its currency driving down their share prices and the Swedish krona.

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

Last Updated: June 5, 2009 08:06 EDT