Swedish krona dives after Latvia failed to sell any debt securities at a local debt auction.

Latvia’s economy gives the impression of being in freefall while a devaluation of its currency looms nearer. On Wednesday, Latva failed to sell any debt securities at a local debt auction, Dowjones news bureau writes.

The Treasury had offered to sell 20 million lats ($20 million) worth of paper maturing in July, as well as 10 million lats maturing in September, 10 million due to mature in December and 10 million maturing in June next year. The auction failed.

This is bad news for the Swedish banks that are key players in the Baltic market. Swedbank is Latvia's largest lender, followed by SEB.

As a result of the failed auction, Swedbank and SEB shed 15.9 and 11 percent respectively on the Stockholm stock exchange. Nordea was down 5.2 percent and Handelsbanken 4.0 percent while the Norwegian lender DnB lost 8.1 percent on Wednesday. Also the Swedish krona fell sharply during the afternoon.

More and more economists stress the Latvia is heading for devaluation of its currency, something that the Latvian Prime Minister Valdis Dombrovskis tries to avoid. He recently said that the decision to devalue lat is more painful than cutting budget.

“If we conventionally cut everything 10 pct, which is not planned, it would be unimaginable decrease for budget. At the same time, if we’re talking of devaluation, it definitely won’t be less than 15 pct. It’d most likely be 30 percent”, said Valdis Dombrovskis, Baltib Business News writes. “That means that people’s real income shrinks very fast much more than the government does by cutting expenditures”.

As recently as 2007 Latvia boasted double-digit economic growth. Today the economy is going through its deepest crisis since it broke free from the Soviet Union in 1991.