Banks, EU – Baltic States, Financial Services, Latvia, Legislation, Loan

Loans late by more than 90 days in Latvia reached 19% of the total in May, according to the country’s banking regulator. Borrowers have struggled to service their debt after a real estate-fueled economic boom turned to bust and the country's economy contracted 18% last year, reports LETA referring to Bloomberg.

"We do not expect the law to have any significant impact on the Nordic Banks" because they have already taken large provisions in the Baltics, Maths Liljedahl and Pawel Wyszynski, Sweden-based analysts at Nordea, said in an e-mailed note. "Also, the banks themselves have taken part in establishing new rules."

The Baltic state's government was forced to turn to a group led by the International Monetary Fund and the European Commission for a EUR 7.5 billion loan in 2008 after Latvia's second-biggest bank collapsed. Unemployment rose to 20.4% in the first quarter, the highest in at least eight years, a labor-force survey released on May 14 showed.

Latvia's banking sector is dominated by Nordic lenders led by Swedbank AB, SEB AB, Nordea AB and DnB Nord AS, which accounted for about 64% of total lending in the first quarter, according to the Association of Latvian Commercial Banks.

Still, the legislation is "obviously bad news and quite negative for the Latvian banking sector," said Lars Christensen, chief emerging markets analyst at Danske Bank A/S, in an e- mailed note today, on Tuesday. "It should be noted that overdue loans in Latvia by the end of June rose to 28.6% of all loans. The credit crisis is hence far from over in Latvia."

The law allows borrowers declared bankrupt to write off their debt after two years if they repay 35% of what they owe. A debtor who can repay 50% of what he owes is entitled to have his debt written off after one year.

The bill is due to take effect on November 1, 2010. The legislation previously adopted by parliament, which was returned by President Valdis Zatlers, would have allowed debt to be forgiven by paying 30% of the debtor's income for two years. Zatlers has yet to sign the law.