recent accession countries) are hamstrung - just like Ireland in the
euro - in what they can do to extricate themselves from the crisis.
Latvia may be “a small faraway country about which we know little”
but in a time of financial instability the system is like a
beautifully made domino construction. Latvia and neighbouring
countries owe $1.3 TRILLION to western european banks. A failure
could cause collapses all over western Europe. In turn this would
adversely affect us here in Britain.
xxxxxxxxxxx cs
================================
TELEGRAPH 4.6.09
Latvian debt crisis shakes Eastern Europe
Latvia has become the first EU country to face a sovereign debt
crisis after failing to sell a single bill at a treasury auction
worth $100m (£61m), prompting fears of a fresh storm in Eastern
Europe as capital flight tests currency pegs.
By Ambrose Evans-Pritchard
The central bank has been burning reserves to defend the lat in
Europe’s Exchange Rate Mechanism but markets doubt whether Latvia
has the political will to carry through draconian cuts in spending –
or whether such a policy even makes sense at this stage.
Tremors hit bank shares in Stockholm and triggered a sharp fall in
Sweden’s krona. Swedbank, SEB and other Swedish banks have $75bn of
exposure to the Baltic states, and face cliff-edge losses if the pegs
snap.
“Latvia may be a small country but it has vast repercussions for the
region,” said Bartosz Pawlowski, of BNP Paribas. “If the currency
breaks in Latvia, it is likely to break in Estonia and Lithuania as
well, and perhaps Bulgaria, with effects on other countries like
Romania.”
Fresh turbulence in the ex-Communist bloc would rattle West European
banks, which have €1.3 trillion of exposure to the region. “We
haven’t yet seen the full extent of the crisis in the East European
banking system. Defaults are creeping higher,” he said.
The G20 deal in April to triple the IMF’s fire-fighting fund to
$750bn has reduced the risk of a currency conflagration, but while
the larger reserves will buy time, it does not change the fact that
some countries have taken on too much debt.
Latvia’s premier Valdis Dombrovskis warned against a devaluation
“quick fix” but may have fuelled the flames further by admitting that
the lat is overvalued by a third. [That wasn’t a very bright think
to say! It’s like lighting a cigarette in an oil refinery! -cs]
“If we’re talking of devaluation, it definitely won’t be less than
15pc. It’ll most likely be 30pc. Real incomes will shrink very fast.
The immediate shock will affect absolutely everyone and everything,”
he said.
Latvia faces a calamitous hangover after blazing the trail of euro,
Swiss franc, and yen mortgages. Fitch Ratings says foreign debt
maturing in 2009 is equal to 320pc of foreign reserves.
The finance ministry expects GDP to contract 18pc this year. House
prices have fallen 50pc , the world’s most spectacular crash. A third
of the country’s teachers are being fired and public salaries will be
slashed by up to 35pc to meet bail-out terms imposed by the IMF and
the European Commission. The policy risks a deflation spiral that
defeats its own purpose.
“The level of adjustment is too extreme and it is testing the social
and political fabric of the country,” said Tim Ash, from the Royal
Bank of Scotland. “You have to ask whether they are sacrificing the
Latvian economy to protect Swedish banks. It would be better to
devalue now and clear the air.” [This is where our refusal to join
the euro pays off! We do not have to have the sudden shock of a
devaluation. Not so long ago the pound-euro rate was €1.28 to £1.
That fell to €1.06 but is now at €1.15. It adjusys itself daily -cs]
Mr Ash said Latvia had crossed the Rubicon this week when the justice
minister called for a debate on the peg and key adviser Bengt Dennis,
ex-governor of Sweden’s Riksbank, said the only question about
devaluation now was “how it will be carried out”.
Days earlier the Riksbank said it was boosting foreign reserves by
$13bn, clearly a precaution in the face of Baltic risk. Swedish
officials seem to have accepted that nothing is to be gained from
prolonging the Baltic agony. SEB said it faces equal losses either
way, slowly under the peg or short and sharp through devaluation.
Leaks suggest that the IMF favours devaluation, the normal cure for
countries that overheat. It was overruled by the European Commission,
deeming retreat from the ERM peg to be a threat to Europe’s fixed-
exchange orthodoxy. [Politics taking precedence over economic sense -
cs]
Mr Ash said the crisis was playing out much like the final days of
the Russia debacle in 1998 and the end of Turkey’s crawling peg in
2001, with momentum building until a critical point of no return.
===========================
EU OBSERVER 4.6.09
Latvia fails to raise money on market
ANDREW WILLIS
Economic concerns spread across Central and Eastern Europe on
Wednesday (4 June) after it emerged that an attempt by the Latvian
government to raise money through the sale of treasury bills on
Tuesday had received no bids.
The failure draws a big question mark over the ability of some
countries in the region to raise their own capital and prompted large
share price falls in Swedish banks that have invested heavily in the
country.
Several factors appear to have prompted the poor uptake of the
country's sovereign debt including uncertainty over the pending local
and European elections and a lack of liquidity in the market with
banks wishing to hold onto their cash reserves.
Fears over a possible currency devaluation were also behind the
decision of investors to shun the 50 million lats (€70m) worth of
treasury bills on offer, said analysts.
"The country is in a mess with the economy expected to contract very
sharply this year, while the budget deficit is horribly high.
Devaluation looks very likely as a way of boosting exports and
growth," said RBC Capital Markets strategist Nigel Rendell, reports
the Financial Times.
The lat is currently pegged to the euro as part of the country's bid
to join the common currency and Latvian officials have repeatedly
denied the need for a devaluation.
A decision to do so however would help remove market uncertainty but
would also effectively increase the cost of debt repayments for
citizens and businesses to foreign lenders.
International Monetary Fund
The failure to raise badly needed capital on international markets
will increase pressure on the Baltic state to secure its second
tranche of money from the International Monetary Fund.
In December the international institutional agreed to provide Latvia
with a €7.5 billion loan but failure to implement budget cuts
resulted in a €200 million payment being held up in March.
Prime Minister Valdis Dombrovskis told local media the parliament now
plans to accept budget amendments on 17 June so it can receive about
1.2 billion lats (€1.69 billion) of international loans in July.
A recent forecast by the European commission predicted the country's
budget deficit could reach as high as 11.1 percent this year.
Following the news of the debt issuance failure, currencies in the
region including Poland's zloty and Hungary's forint fell against the
euro. The Swedish krona did likewise due to the country's heavy
investment in Latvia.
======================
SEE ALSO:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayZBuB0gVd1Y
and
http://www.ft.com/cms/s/0/aa629880-5068-11de-9530-00144feabdc0.html
Thursday, 4 June 2009
Small and faraway but still poisonous
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