The failure of a Latvian sovereign debt sale on June 3 sent tremors through financial markets and slammed Swedish banks exposed to the Baltics
Economic concerns spread across Central and Eastern Europe on Wednesday (3 June) after it emerged that an attempt by the Latvian government to raise money through the sale of treasury bills on Tuesday had received no bids.
The failure draws a big question mark over the ability of some countries in the region to raise their own capital and prompted large share price falls in Swedish banks that have invested heavily in the country.
Several factors appear to have prompted the poor uptake of the country's sovereign debt including uncertainty over the pending local and European elections and a lack of liquidity in the market with banks wishing to hold onto their cash reserves.
Fears over a possible currency devaluation were also behind the decision of investors to shun the 50 million lats (€70m) worth of treasury bills on offer, said analysts.
"The country is in a mess with the economy expected to contract very sharply this year, while the budget deficit is horribly high. Devaluation looks very likely as a way of boosting exports and growth," said RBC Capital Markets strategist Nigel Rendell, reports the Financial Times.
The lat is currently pegged to the euro as part of the country's bid to join the common currency and Latvian officials have repeatedly denied the need for a devaluation.
A decision to do so however would help remove market uncertainty but would also effectively increase the cost of debt repayments for citizens and businesses to foreign lenders.
International Monetary Fund
The failure to raise badly needed capital on international markets will increase pressure on the Baltic state to secure its second tranche of money from the International Monetary Fund.
In December the international institutional agreed to provide Latvia with a €7.5 billion loan but failure to implement budget cuts resulted in a €200 million payment being held up in March.
Prime Minister Valdis Dombrovskis told local media the parliament now plans to accept budget amendments on 17 June so it can receive about 1.2 billion lats (€1.69 billion) of international loans in July.
A recent forecast by the European commission predicted the country's budget deficit could reach as high as 11.1 percent this year.
Following the news of the debt issuance failure, currencies in the region including Poland's zloty and Hungary's forint fell against the euro. The Swedish krona did likewise due to the country's heavy investment in Latvia.