UPDATE 1-Swedbank says mortgage plan threatens Latvia ops
* Would review Latvian operation if mortgage plan passed
* Banks to meet Latvian prime minister next week
* Swedbank has $3.4 bln exposure to Latvian mortgage market
* Swedbank shares rise on Nordea merger speculation
(Adds quotes from Latvian commercial bank association)
STOCKHOLM/RIGA, Oct 12 (Reuters) - Swedbank said on Monday it would review its business in Latvia if a controversial mortgage plan went through, and banks said they would meet the country's prime minister next week to discuss the issue.
Latvia's Prime Minister, Valdis Dombrovskis, angered banks last week with his surprise proposal. [ID:nL8188838]
He said he wanted to limit what banks can collect from defaulted home loan takers to the collateral, which would cause banks' bad debt losses to soar as many property values have slumped below the value of the debts used to purchase them.
"If this runs through we need to reconsider our operations in Latvia," said Thomas Backteman, vice president of corporate communications for Swedbank, the largest bank in Latvia and the one most exposed to the harsh recession in the Baltic states.
He said he did not believe the proposal would fly, but that the bank was closely monitoring the situation.
Passing the proposal would increase political risk and make it difficult to work in a situation when a government decides legal issues retroactively. "That's very far from the established legal practice in the EU," he said.
He said banks would meet the prime minister on Oct. 22.
This was seconded by the head of the Association of Latvian Commercial Banks.
"We will give our arguments that this idea is absurd and without any base and is against Latvian civil law," association head Teodors Tverijons told Reuters. If it was carried out, it would lead to sharp reductions in crediting from banks.
The banks would also meet European Economic and Monetary Affairs Commissioner Joaquin Almunia, who is visiting Latvia on Tuesday to push Latvia to live up to promises to slash its 2010 budget deficit. "We cannot keep quiet about this," he said.
Though Latvia's woes have overshadowed Swedbank recently, its shares got a lift after a report that a possible tie up with largest Nordic bank Nordea (NDA.ST) could be in the pipes.
by 1426 GMT, Swedbank shares were up 5.5 percent. "It's partly the rumours about a merger with Nordea and the fact the bank is threatening to downsize in Latvia," said a trader.
Swedish daily Dagens Nyheter said a possible merger between Swedbank and Nordea (NDA.ST) was being evaluated by Nordea's largest shareholder, Sampo. (SAMAS.HE)
Sampo and Swedbank declined to comment on the matter.
EXPOSURE
Analysts have said the reform would effectively mean people could walk away from their debts and leave their properties in the hands of the bank.
Some analysts have also seen a devaluation risk in the proposal as it would cap home owners' losses, most of whom have loans in foreign currencies. Dombrovskis has denied any link with devaluation in his proposal. Latvia's central bank continued to intervene in the foreign exchange market last week. It said on Monday it sold 15 million euros and bought lats amid controversy over the country's 2010 budget plans. [ID:nC2041]
The lat was slightly firmer in late trade after the government earlier promised to make the budget adjustments that international lenders want it to carry out.
Backteman said Swedbank had a "substantial" exposure to the Latvian mortgage market. Out of a total of some 61 billion crowns ($8.7 billion) of exposure to Latvia, 24 billion crowns came from mortgage loans, he said.
Latvia's bank sector is led by Swedbank (SWEDa.ST), SEB (SEBa.ST), Nordea and DNB Nord (DNBNOR.OL), which are already facing big losses in a real estate crash.
Nordea said its total lending in Latvia is about 3.1 billion euros ($4.56 billion), of which 1.1 billion was housing loans.
SEB said the impact on it was restricted as lending in Latvia was 3 percent of total loans to corporates and homes.
It said lending to corporates and households in Latvia was 40 billion crowns, of which 11 billion crowns was mortgages. SEB said it was also planning to participate in the meeting next week. (Additional reporting by Brett Young in Helsinki; Editing by John Stonestreet and Andrew Macdonald) ($1=7.037 Swedish Crown) ($1=.6795 Euro)
