The Swedish business newspaper Dagens Industri reports that a devaluation of the Latvian lat is drawing ever closer and that the Swedish central bank, Sveriges Riksbank was borrowing 100 billion SEK to bolster its foreign currency reserves ahead of the likely move by the Latvian central bank, which would probably be followed by devaluations in Estonia and Lithuania.
Latvia's central bank governor gave a bizarre hint at a devaluation by saying that if Latvia didn't get international loans, it would have to issue some kind of scrip (taloni--literally, coupons) instead of paying salaries to public sector employees. This would effectively be a second currency with which to buy food and pay rent and would undermine the current legal tender, the lat.
According to Dagens Industri, a devaluation would hit hardest at Swedbank, which has SEK 217 billion in lending to Baltic borrowers, most of it in the form of euro-based loans. The level of distressed debt has been rising even without a devaluation (or because of the domestic devaluation due to drastic salary cuts). The newspaper says Swedbank may have to raise at least SEK 10 billion in new capital. Both Swedbank and SEB (Baltic exposure SEK 186 billion) share fell on the Stockholm Stock Exchange, but SEB is seen as sufficiently capitalized for the moment.
A devaluation in the near future will effectively subject Latvia to the worst of both worlds -- wage cuts and mass unemployment that have slashed purchasing power to the minimum, and a further cut in living standards when the inflationary effects of a devaluation are passed along.