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Struggling Latvia property market looks to Sweden for rescue plan

For historical reasons Sweden has always been close to the country and its banks are the biggest lenders. Austria has a big stake too.

But where Latvia was once the fastest growing economy in Europe, it is now the fastest shrinking. Obtaining funds is the biggest hurdle for property investors and bad loans are soaring.

There is also concern that neighbouring markets could also suffer. 'Sweden has a bigger business interest in Latvia than any other country in the world,' said Morten Hansen, who heads the economics department at the Stockholm School of Economics in Latvia's capital, Riga. 'If Latvia's economy should get into further trouble, there could be contagion and it could spread to Estonia and Lithuania,' he added.

Indeed Nobel Prize-winning economist Paul Krugman has said that the global economic crisis is at its most dangerous in the European periphery. 'The money has dried up. The centre of this crisis has moved from the US housing market to the European periphery,' he said.

And it is Sweden, once the ruler of Latvia, that people are looking to for a rescue plan. Sweden has announced a $190 billion loan guarantee plan for banks, who say their riskiest loans are in the three Baltic states.

'Sweden has been a great help, and Swedish banks established our banking system. They helped build the modern Latvia. It's not just self-interest. The Swedes don't want to see Latvia go down,' said Aleksanders Cakste, a hotel owner and great great grandson of Latvia's first president.

But others say that it is panic that is prompting the benevolence. The property boom, according to some, was fuelled by foreign banks offering easy credit, the very banks that are now suffering losses. 'Swedbank has made a huge amount of money in the Baltics, but it has happened through an enormous credit expansion. It's a catastrophe,' said Tore Liedholm of the Swedish Shareholders' Association.

'From the top of the market, we've had to cut the price of apartments by around 35%,' said Viktors Savins, of ARCO Real Estate. 'The boom is over. Investors were encouraged to borrow up to 10 times their salary by foreign banks. They were trying to fulfill a dream of getting rich quickly by doing nothing,' he added.

'Over the last few years there has been an orgy of credit. People have been borrowing on the assumption that the boom years would go on forever but now they've stopped and they're having to deal with it,' said Alf Vanags, from the Baltic International Centre for Economic and Policy Studies.