Economic concerns spread across Central and Eastern Europe on Wednesday (3 June) after it emerged that an attempt by the Latvian government to raise money through the sale of treasury bills on Tuesday had received no bids.
The failure draws a big question mark over the ability of some countries in the region to raise their own capital and prompted large share price falls in Swedish banks that have invested heavily in the country.
Several factors appear to have prompted the poor uptake of the country's sovereign debt including uncertainty over the pending local and European elections and a lack of liquidity in the market with banks wishing to hold onto their cash reserves.
Fears over a possible currency devaluation were also behind the decision of investors to shun the 50 million lats (€70m) worth of treasury bills on offer, said analysts.
"The country is in a mess with the economy expected to contract very sharply this year, while the budget deficit is horribly high. Devaluation looks very likely as a way of boosting exports and growth," said RBC Capital Markets strategist Nigel Rendell, reports the Financial Times.
The lat is currently pegged to the euro as part of the country's bid to join the common currency and Latvian officials have repeatedly denied the need for a devaluation.
A decision to do so however would help remove market uncertainty but would also effectively increase the cost of debt repayments for citizens and businesses to foreign lenders.
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