AIB's Baltic banking subsidiary, AmCredit, could be facing writedowns as high as 70% on its Latvian mortgage book if a government proposal to cap mortgage borrowers' liabilities becomes law.

Last week, the Latvian prime minister Valdis Dombrovskis proposed limiting mortgage liabilities to the value of the loan collateral in a move widely interpreted as a prelude to devaluing its currency, the lat, to help avoid deep budget cuts demanded by the IMF. As property prices have fallen on average to about 30% of their boomtime highs, the consequences would be devastating for the loan books of western European banks which have lent money in the country.

AIB bought Amcredit, the mortgage finance business of the Baltic-American Enterprise Fund, which operates in Latvia, Lithuania and Estonia, in early 2008 for €116m. The idea was to replicate the success of its Polish subsidiary, BZWBK, but business has gone badly in the last year. By the end of 2008, AIB had written off €33m of on the acquisition: €15m of goodwill and €18m of combined operating and loan losses.

Impaired loans reached €19m, or 16.8% of the total, as the three Baltic states struggled with the global recession.