Latvian Credit Slowdown

This in Bloomberg today:

Latvian Borrowing Boom Is Waning, Central Banker Rimsevics Says

Steps by Latvia's government and commercial banks to curtail a borrowing boom and avert an economic slowdown are helping stabilize growth, central bank Governor Ilmars Rimsevics said.

The economy grew 11.2 percent in the first quarter, the fastest pace in the European Union, as wages and investment soared, pushing credit evaluators to warn about a ``hard landing.'' Rimsevics said voluntary steps by AS SEB Unibanka and Swedbank AB helped control lending even before the government imposed restrictions on March 16.

``The market is starting to tighten credit growth,'' Rimsevics said in an interview yesterday in the capital Riga. ``This is very, very important. This took place already last October, November and December.''

The former Soviet state's economy has expanded more than 10 percent in the last eight quarters, fueled by cheap credit and a boom in demand for imports and real estate. Accelerating inflation forced the government to delay euro-adoption plans and prompted Standard & Poor's cut Latvia's credit rating .

The inflation rate of 8.8 percent in June is the highest in the EU bloc and the current-account deficit is the widest.

Rimsevics said credit growth slowed to 77 percent in May, compared with an increase of 89 percent in January, and real estate prices have stabilized.

Seeing Results

``We are starting to see the results,'' of the drying-up of credit, he said. ``I am optimistic we are going to see further developments and an orderly slowdown.''

Among new requirements, consumers must now present a notice from the revenue service showing their legal income to get a loan.

Four of Latvia's five biggest lenders are owned by Nordic or German banks and control 65 percent of the lending market, according to the Association of Latvian Commercial Banks Web site.

``We had a management meeting in February, where it was decided we should be more careful,'' said Andris Vilks, chief economist at AS SEB Unibanka, Latvia's second-biggest lender. SEB Unibanka is a unit of SEB AB, Scandinavia's third-biggest bank.

``They had this experience,'' in Scandinavia when an overheated real-estate market was followed by a housing bust, Vilks said. ``SEB suffered during that time,'' he said.

As banks and the government tighten lending standards, annual credit growth could fall to as low as 55 percent by the second half of the year, Vilks said.

Implicit Understanding

``Implicitly banks understand that credit growth has to come down,'' said Martins Kazaks, chief economist at AS Hansabanka, Latvia's biggest lender. Hansabanka has moderated plans for credit growth this year, he said. The lender is owned by Swedbank AB.

European Union Monetary Affairs Commissioner Joaquin Almunia said there is more to be done to cool the economy. He called on the government to cut fiscal spending further, echoing demands by the International Monetary Fund.

``You have to remember that they are coming from a deficit of 1.4 percent'' of gross domestic product ``at the beginning of March to a surplus budget within just four months,'' Rimsevics said. ``I think it's a very huge commitment, and a big psychological change in their thinking. This is already a very important turning point.''