Eurozone tremors spread to Baltic States: Banks in Lithuania and Latvia collapse

November 23, 2011 – LATVIA - Last week Lithuania’s fifth largest bank, Snoras, was nationalized as Lithuanian authorities shut down the bank after it observed irregularities in the bank’s operations. This morning the Latvian authorities suspended the Latvijas  (Latvian Savings Bank). Krajbanka is Latvia’s ninth largest bank. We think the systemic risk from these events should be relatively limited if handled properly by the authorities. That said, the collapse of especially Snoras is not good news for the Lithuanian economy as it creates uncertainty about the economic outlook. In our view it is especially important that the nationalization of Snoras is handled in such a way as to put minimal pressure on Lithuanian public finances that are in a precarious state as it is. A full nationalization of Snoras in the sense of taking over all liabilities would be unwarranted. Yesterday Lithuanian Prime Minister Kubilis said that the problems at Snoras might involve “shady financial transactions” (according to the news agency Reuters) and the case was more “complicated” than initially thought. Lithuanian central bank governor Vasiliauskas at a news conference said that “we thought it was a flu, but now it seems to be a small cancer.” These comments obviously give some reason for concern. (Above) Customers stand in line to withdraw money from Krajbanka in Latvia on November 23, 2011. –FX Street 

According to Snoras, the bank is Lithuania’s fourth-largest by capital size and ranks fifth in terms of assets. The exact causes behind Snoras’s financial difficulties have not been made clear. The idea of a bank-run causes shivers in Latvia. In November 2008, it nationalized Parex, the Baltic state’s largest locally-owned bank, after depositors jittery about the country’s deepening economic crisis began withdrawing their cash. A month later, Latvia was forced to turn the EU and International Monetary Fund for a 7.5-billion-euro emergency loan package, which has been paid out in tranches amid one of the most draconian austerity drives in Europe. Latvia’s economy shrank by 18 percent in 2009, the deepest recession in the 27-nation EU, but has been recovering for a year. –MSN excerpts

contribution Luisport