* 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 details)
By Mia Shanley and Simon Johnson
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.
The 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 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.
The Riksbank has flooded the financial markets with money since the start of the crisis, easing a credit crunch which made it hard for banks to borrow. Now its coffers needs replenishing.
The move, which the Riksbank said was temporary, hurt the Swedish crown, which at the end of Stockholm trading was close to one percent down on the day against the euro.
"It shows that the crown is still vulnerable to concerns about the Baltics," said Johanna Jeansson, analyst at Nordea.
The Riksbank said it was borrowing foreign currency funds through the national debt office and 65 billion crowns of the total would be transferred to the central bank before the summer. Sweden's summer holiday season begins in mid-June.
The debt office said it had already borrowed substantial amounts in both dollars and euros during the first half of 2009, a point which analysts said would make the impact on the currency less severe as it entailed less outright crown sales.
Swedish banks SEB and Swedbank are the biggest players in the Baltic countries, where economies are expected to contract more than 10 percent this year.
The two banks were forced to take billions of crowns in provisions in the first quarter to cover souring credits in the region. Added together, they have just over 400 billion crowns ($52 billion) of loans outstanding there.
GREEN SHOOTS?
There was also gloomy economic news from the 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.
"We are in a tight corner and public finances are stretched," Finance Minister Anders Borg said at a meeting of senior officials from around the Baltic region.
Sweden is expected to suffer its biggest economic contraction in more than half a century this year. First quarter GDP figures, due on Friday, are 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.
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.
"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 Stephen Nisbet)