Inflating vs deleveraging, what about the next step?

* Inflating to avoid an immediate crash -inflating the crash potential in the process.

To some extent, the Latvian scenario is a case in point. An extreme case but yet so visibly similar to other governments behaviour during this crisis. Youve got liquidity problems? Increase your leverage! The leverage days should be behind us. However, the behaviour so far has during the crisis has not indicated that this is necessarily the way authorities view it. Back to good o´l leverage days alá 2006?

The world was not "normal" during 2002-2007. Still it seems markets perceive that time period as "normal circumstances" which we will soon revert to. I dont think so. Although deleveraging has not been the main theme so far this crisis, it will become a crucial factor.

Either deleverage now or live with no or very low growth for a number of years. Its basic riskmanagement. Although certain liquidity providing measures have been necessary so far, in order to avoid a complete breakdown, many measures have been misguided and overdone. This has instead increased leverage and the overall risk and cost in the process. Stakes and risks are increasing, although the general media and so called expert noice is sounding all clear. Well see.

To extend on the by now infamous analogy by the former Citigroup CEO Charles "still dancing" Prince; Ill stay at the party, but Ill be dancing close to the exit and I am making sure my helmet is within reaching distance.



* The Swedish Riksbanks "stresstests" - everything´s fine - still.

So, basically, even if theres a devaluation in Latvia, even if there are devaluations in all three Baltic countries. Even if those devaluations reach 40%-65%, even if credit losses in the Baltics reach 30%-40%. Even if the CEE and the Euro area starts crumbling due to no pull traction from China and the US 2H this year. Even if Swedish taxpayers and domestic demand gets hit hard as a consequence, with higher unemployment, lower realestateprices, etc etc due to the Baltic crisis. Even if Swedish venture capitalists go belly up, the Swedish banks will make it?


Actually, the Swedish Riksbank did not use those assumptions when they made their report.
They did not even mention any devaluation risk. They estimated creditlosses in the Baltics to 10%. In Ukraine, 30%. In Sweden,1.3%. Denmark and Norway, 1,95%. UK, 3.9%.
Poland,5% and Russia,10%.
All for the period of the next two years, 2009-2010. During the same timeperiod, Swedish bank earnings are expected to be 85% of consensus expectations.

Under the Swedish Riksbanks expectations the Swedish banks would make it. Please note that their expectations are rather conservative. Not really what I would call a stresstest anyway. Riksbank still living in the 2006 days, eh? The low volatility quant days. Well, well see how this plays out.

Swedish taxpayers should already be aware that the government backed bank programme is already having unintended consequences, as the Swedish banks "arbs" the Swedish taxpayers by borrowing at a discount from the Swedish taxpayers and lending at a premium in the Baltics. The taxpayers take on the wrong side of a digital blow out risk, for an extremely low premium/return. Hardly what I would call protecting the taxpayers capital. Especially as earnings go straight to the banks. An example of debt inflating instead of deleveraging.

Disclosure; I am long Eur/Lvl forwards


*New positions and position changes
- Long puts on Swedbank
- Long puts on SEB



As usual, good luck




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