Sweden extends bank guarantee program

The Swedish government said Thursday it will extend its credit guarantee program for banks by six months to maintain stability in the financial sector, amid fears about economic turmoil in Latvia where Swedish banks do extensive business.

The government said the program, providing credit guarantees to banks of up to 1.5 trillion kronor ($214.5 billion), will be extended to the end of April next year.

"Even if the financial markets have improved during the past year it is too early to start winding up the guarantee program," Financial Markets Minister Mats Odell said in a statement. "There is still a need for an extra security net if financial stability should deteriorate again."

Odell also said he wanted to coordinate the eventual phase-out of bank support programs with other countries within the European Union.

The credit guarantee was part of last year's bank security package, which also included a 15 billion kronor ($2.1 billion) stability fund to bail out Swedish banks with solvency problems.

The Swedish banks Swedbank AB, SEB AB and Nordea AB, account for 50 percent of Latvia's banking industry and mass loan defaults in the Baltics is expected to reverberate through Sweden as well. Latvia has need an international bailout loan and is struggling to prevent a devaluation of its currency, which could hit people who borrowed money in foreign currency.

Earlier this week Sweden's finance minister Anders Borg lashed out at Latvia for failing to fulfill obligations set in a bailout loan agreement signed last summer. The troubled Baltic nation on Thursday said it will try to find ways to further reduce next year's budget deficit and meet lenders' demands.

The Latvian government is holding an extraordinary meeting next Monday to try to come up with budget solutions.

The Latvian currency, the lat, is pegged to the euro, but the country's financial difficulties have led to speculation that the peg might have to be abandoned. If that happens, people who owe money in foreign currency could see payments rise, potentially leading to more loan defaults.