Latvia will need to devalue its currency, Sweden’s former central bank governor Bengt Dennis said.

The economic recession in the Baltic States is a growing headache for Swedish banks. SEB and Swedbank, key players in the market, have lend hundreds of million of kronor to the crisis-hit states. Therefore, a devaluation of Baltic currencies would be a terrible blow for the banks.

According to Bengt Dennis, the former Swedish central bank governor who is advising the Latvian government on its economic crisis, Latvian has no other option than to devalue its currency, he said on Swedish state television SVT.

“No one knows if there will be a devaluation tomorrow or in a few months -- the timeframe is always uncertain -- but we have moved beyond the question of whether there will be a devaluation and should instead focus on how it will be carried out,” he said, Bloomberg writes.

Latvia’s economy is going through its deepest crisis since it broke free from the Soviet Union in 1991. Last quarter the economy shrank 18 percent, the steepest slump in the European Union.

While Latvia’s Prime Minister Valdis Dombrovskis said that a devaluation of the country’s currency was not a scenario being considered, the Baltic News Service reports, Justice Minister Mareks Seglins has opened the door for a potential devaluation.

“I am not calling for the devaluation of the lats, but there must be a debate,” he said.

Not all agree. Anders Åslund of the Washington-based research society Peterson Institute of International Economics, said that Latvia shouldn’t abandon its currency peg. Instead they should stick to the agreed bailout plan and cut budget spending so it can adopt the euro.

“If Latvia would devalue it would be a tremendous blow to everyone,” Åslund said, Bloomberg writes. “I don’t think it would solve anything”.