Baltic Banking Crisis Widening; Bank Depositors Cashing Out!

I’m reporting this week from the Eastern front of the euro-zone meltdown, where an unfolding banking and confidence crisis could be signs of far worse things to come.

It’s hard to believe it was almost one year ago today, that here in Estonia, the small Baltic EU nation I call my second home, we accepted the euro as our primary currency.

Twelve months ago the changeover from the kroon to the euro was heralded with enormous fanfare and celebration, and a great deal of hope and hype. Parades, festivals, PR campaigns, free euro coin holders were everywhere I turned. However, many people back then also had underlying fears of the change too.

And it seems those fears were more than valid … they were prescient.

Be Careful What
You Wish For

Estonia had imposed strict self-austerity for a number of years to attain the “privilege” of adopting the euro as its currency. As a result, Estonia actually boasts the lowest debt-to-GDP ratio of any nation in the EU — any nation — at just 6.6 percent!

The reward for this fiscal discipline: EU membership and being able to join much larger and much less responsible countries like Greece, Italy, and Portugal, and of course taking on the coveted euro. Estonia felt that by taking on the euro it would elevate the country to an equal footing with Western Europe, or at least put it at the table for discussions.

So far that has not been the case.

Estonia’s banking system, similar to Latvia’s and Lithuania’s, is primarily based outside its borders. Swedish, Norwegian and other Scandinavian interests control the majority of the banks. The big three here are Nordea, SEB, and Swedbank, where I personally bank. There are a handful of others, but those are the primary players.

So for all of the advancements in the Baltics due to the European Union, the tenuous nature of just how stable these banks are, as well as the rule of law, became very apparent just a couple of weeks ago.

The failure of Latvian bank Krajbanka rattled the nation, and in fact hit my family directly. My wife’s grandfather is a property owner in Latvia, and his business accounts were based at Krajbanka. At first the Latvian government said accounts would be insured, much like the U.S. does with the Federal Deposit Insurance Corp (FDIC).

However, as the depth of the losses became evident, and it turned out that fraud had caused the collapse, it was announced that funds may not be able to be covered by the government program. Now the government is saying depositors will be covered up to 100,000 euros.

Indeed, the situation has made depositors throughout the region, very nervous.

The Domino Effect of Fear

Krajbanka’s collapse actually followed the collapse of its sister bank — Lithuania’s Snoras Bank. Both of these banks’ problems were based on fraud and deception, and exacerbated by concerns over the EU meltdown.

Then the completely unrelated Scandinavian bank Swedbank experienced a classic “run on the bank.” Almost half of Swedbank’s 298 ATMs in Latvia had to be replenished after running out of money the Monday after the collapse of Krajabank.

Many bank depositors in the Baltics are running for the hills.

Withdrawals rose tenfold topping 10 million lats (US$18.9 million). Swedbank raced to assure depositors and managed to quell the panic, at least for now. Meanwhile the EU uncertainty has only added to depositors’ fears of a banking or currency collapse.

Critics say that Swedbank is not even in the same league as the Latvian or Lithuanian banks, and there is no reason to panic. Possibly.

However putting the money in the mattress for the time being is looking a lot more attractive than any of these banks to many depositors in the Baltics. Actually many wealthier individuals are converting their money to Sterling and supposedly buying real estate, all in an attempt to avoid the euro and buy hard assets.

Gold sounds even better to me, which is one of the strategies Sean Brodrick and I have recommended to our Global Resource Hunter subscribers.

Regardless, the safety and security of institutions with big names can often blow up in investors’ faces, whether here in the Baltics or elsewhere …

Half way around the world MF Global rings an alarming bell. Once the mightiest commodities broker/dealer it has now become the poster child for lack of oversight, theft, and moral hazard. So no matter where in the world you are, you must always be aware of the risks and protect your money as best as possible.

Even Main Street USA is vulnerable.

The future for Eastern Europe remains murky, as does the future of the EU and euro in general. The old saying, “A chain is only as strong as its weakest link” holds very true. And at present the EU has so many weak links who is to say if the Scandinavian banks are able to weather the storm much longer either. The inaction of the ECB, IMF, and EU only adds more uncertainty and fuel to the fire.

So as we ring in the New Year here in Estonia, there won’t be any parades for the euro or excitement even close to last year’s. Just fear and caution, and people ready to race to the ATM at the first sign of trouble. Hardly cause for celebration.

Best wishes,

Kevin