No Iceland scenario here, Baltic leaders say

By Nerijis Adomaitis

VILNIUS (Reuters) - Lithuania and Latvia said on Friday their countries were in no danger of following Iceland into crisis, despite their similar economic imbalances, and analysts agreed a crisis of the same scale was unlikely.

After years of double-digit growth fueled by easy credit, which helped cause their current account deficits to expand, the Baltic states have entered a downturn.

This has created worries for Nordic banks exposed to the market and creating currency jitters, particularly linked to the Latvian lat, despite all their currencies being pegged to the euro. Nevertheless, top Baltic statesmen were calm,

"It is impossible to compare Lithuania to Iceland. The small and open economy of Iceland was brought down by huge external liabilities to financial institutions," Lithuanian Prime Minister Gediminas Kirkilas told a news conference.

Latvian Prime Minister Ivars Godmanis agreed.

"The difference to Latvia is that Iceland had a very high income per capita, and that income was invested into securities, where the volume exceeded the country's gross domestic product by three to four times ... Latvia has a completely different situation," Godmanis said after meeting Kirkilas.

Estonian Prime Minister Andrus Ansip also said this week his nation would not follow Iceland due to the presence of top Scandinavian banks.

Iceland's troubles came because its banks went on a massive expansion spree, funded by borrowed money. When confidence in the Icelandic banks collapsed and they could not refinance their loans, then the whole country suffered.

Though worries have been expressed over the exposure of Swedbank and SEB to the slowing Baltic economies, they are seen as unlikely to abandon the markets.

"All of our largest banks are foreign-owned and in our case (Swedbank) it is much easier to get money and support from Sweden than anywhere else," said Martins Kazaks, the chief economist at the Latvian unit of Swedbank.

Nordea analyst Anssi Rantala agreed.

"The central role of Scandinavian banking groups is a stabilizing factor for the Baltic countries in the current global financial market turbulence," he said.

One positive for the countries has been their small and illiquid local financial markets, which have made it difficult for speculators to take forward positions.

However, some disagree. National Australia Bank said in a note to clients this week there was potential for a "massive devaluation" of the Latvian lat and that conditions were ripe for a move on it and some of its neighbors.

The lat is pegged to the euro, with a 1 percent fluctuation band. It has been stuck at the weak end of the band all week, meaning the central automatically intervenes to support it.