* Riksbank to boost currency reserves to allow FX lending
* Central bank measures hit Swedish crown
* Swedish agency sees wider govt budget deficit
* Swedish consumer confidence higher, beats expectations
(Adds deficit forecast, consumer confidence figures)
By Mia Shanley
STOCKHOLM, May 27 (Reuters) - Sweden's central bank said on Wednesday it would boost foreign currency reserves by 100 billion Swedish crowns ($13.3 billion) to allow it to lend banks foreign currency, dealing a blow to the crown.
The central bank's move was seen as a line of defence against potential fallout in the Baltic region, now mired in recession, where Swedish banks have built up large exposures after lending heavily to the once booming economies.
Riksbank Governor Stefan Ingves said Sweden needed to build up its foreign currency reserves in case the global financial crisis worsened.
"We still need to be prepared for the eventuality that the financial crisis may be both severe and prolonged," he said in a statement.
The Riksbank has flooded the financial markets with money since the start of the crisis, easing a credit crunch which made it hard for the country's banks to borrow, and now it needs to replenish its coffers.
The move, which the Riksbank said was temporary, hurt the
Swedish crown
"It shows that the crown is still vulnerable to concerns about the Baltics," said Johanna Jeansson, analyst at Nordea, but added: "We think the crown movement is exaggerated."
Analysts said the overall impact on the crown should be limited since the Swedish debt office had already borrowed the necessary amount in the first part of the year.
Johan Javeus, head currency strategist at SEB, said Swedish crown outflows would be limited to interest payments.
"But it's still not positive for the crown and the currency has weakened a bit on the decision," he said.
GREEN SHOOTS?
There was also gloomy economic news from country's budget watchdog.
The National Financial Management Authority on Wednesday raised its forecasts for the central government budget deficit this year and next to reflect efforts by the ruling alliance to boost growth through additional spending. [nSAT006283]
Sweden is expected to suffer its biggest economic contraction this year in more than half a century, with first quarter GDP figures due on Friday expected to show a steep 6.5 percent annual decline.
But Swedish investors had some reason for optimism. A Riksbank report showed market players were turning slightly less risk averse. [nWEA4351]
Fresh data also showed surprisingly strong consumer confidence levels in May, lifting expectations that the country may have seen the worst of the economic downturn.
Confidence rose to minus 11.0 points in May from minus 21.0, landing well above the minus 18.0 seen in a Reuters poll. [nSAT006281]
"If you just take the numbers, it's probably going to fuel the green shoots scenario which has been driving markets for some time now," said Michael Bostrom, analyst at Danske Bank.
But while a recovery may be in sight, headline figures are likely to make ugly reading for some time to come.
"It is still the case that these levels point to GDP continuing to fall in the second quarter, but nevertheless it is a little more upbeat than the lowest levels seen," said Olle Holmgren, analyst at SEB. (Editing by Mike Peacock)