the course of the crisis as a result of the large imbalances in the baltic economies, developments would sooner or later have led to an economic crisis regardless of the external circumstances. now the global financial crisis acted as the trigger. investors no longer wished to take on as much risk and as the baltic region was considered risky, with a risk of their currencies devaluating, capital was withdrawn from the region. governments and banks, both local and foreign - owned, experienced difficulties in finding funding. the outflow led to an acute currency crisis in latvia. the downswing in the economies was very rapid and severe, as a number of factors combined : • the countries ’ competitiveness had been undermined by the large wage increases, at the same time as the strong demand in the domestic markets had led to a waning interest in production for export. • “ bubbles ” of overproduction and high prices, primarily in the property sector, led to a more or less complete stop in construction. • the global crisis meant that demand for the countries ’ export goods declined. • the global crisis led to foreign investors being neither willing nor able to inject capital to the baltic countries. at the same time, foreign depositors made large withdrawals from the banks. the crisis led to gdp in the baltic countries falling by up to 20 per cent during 2009 alone, and budget deficits soared, as did the outflow of currency, which put pressure on the foreign currency reserves. real wages fell, unemployment rose, property prices collapsed and the number of borrowers experiencing problems repaying their loans increased rapidly. however, the outcomes in the different countries differed somewhat from one another. how has the riksbank assessed developments in the baltic countries and what action has it taken? as many of the major swedish banks have such large commitments in these countries, the riksbank has long been closely following developments in the region. this forms a natural part of our work in the financial stability field, which also encompasses other countries where the swedish banks have a significant presence. we analyse statistics and other information from these countries and we discuss developments with management and employees at their central banks, governments and financial supervisory authorities. we also follow the reports on these countries from other sources such as the imf, the eu / ecb and market data. representatives of the riksbank have accompanied the imf on several of their visits to the baltic countries and have taken part in the discussions with governments and public authorities there

to cooperate in analysing and solving problems and to clarify the distribution of roles and responsibilities. when the crisis moved into an acute phase in latvia in december 2008 and large amounts of capital left the country, a loan agreement was signed at very short notice with the riksbank and danmarks nationalbank on the one side and the latvian central bank on the other side. the agreement totalled eur 500 million, around sek 5 billion. the main purpose of the agreement was to support latvia ’ s foreign currency reserve up to the point when the first payments from the imf and eu became available. one condition was that latvia should sign an agreement with the imf, as the riksbank neither can nor should become involved in assessing whether or not the country is making the necessary economic adjustments. the riksbank ’ s assessment was that if latvia had not received extensive financial support from abroad at this stage it could have led to uncontrolled exchange rate depreciation and very large currency outflows. in february 2009 the riksbank offered an arrangement to the estonian central bank for short - term currency support. this arrangement was never used. its purpose was to give the central bank the possibility to provide emergency liquidity support in the event of an acute crisis in local currency to the swedish subsidiaries. it thus had a different purpose than the agreement with latvia. given estonia ’ s own currency board arrangement, it would not otherwise have been possible for them to provide support other than on a very small scale and the swedish authorities would have been forced to take full responsibility for a liquidity injection. this agreement is a good example of the allocation of responsibility between countries with interwoven financial systems. the legal base for the riksbank ’ s loan arrangements with latvia and estonia is described in the sveriges riksbank act, which enables loans to be granted for monetary policy purposes and currency policy purposes. an acute crisis in these countries would probably have such repercussions in sweden that it would be difficult for the riksbank to conduct efficient monetary policy, and the exchange rate would probably be weakened to an extent which would be detrimental to sweden ’ s economic development. the riksbank has strengthened its own foreign currency reserve through extensive borrowing abroad to have sufficient resources to be able to act effectively in a crisis. the size of the foreign currency reserve prior to the borrowing was not adequate to meet the demand for support measures that arose. when access to foreign markets disappeared after the lehman