We were lucky - we got out in time from our ‘peg’ to the euro - ‘Black’ or not it was a good Wednesday! You’d think the IMF and the rest of the world would have learned the lesson. But it seem,s it’s only Britain that leartned that lesson. Argentina ruined itself clinging on to its peg to thje dollar and now Latvia is in the same lunatic situation - and dragging foolish Sweden and half of Eastern Europe down with it. Now the endless bail-out funds are merely being used to prop up the value of the Lat when it would be much better floating freely.
Of course the macho-types in Brussels won’t be happy because it will all show up the weaknesses of the Euro (praised by Lord Rhumba of Foy yesterday) . And - in passing - I would add Ireland would also get out of its troubles much quicker it it quit the euro which it never should have joined in the first place!
Here’s the up-to-date picture.
Christina Speight
TELEGRAPH
13.6.09
Latvia's rotten peg needs pulling
The Latvian currency is hugely overvalued, making the country unviable. Big loans can keep Latvia going. But a devaluation of the lat is as essential as pulling a rotten tooth that is poisoning the whole system.
By Ian Campbell, Breakingviews.com
The extraction will be bloody in Latvia and in Sweden, whose banks are badly exposed. But it must be done – the sooner the better.
A whole host of official organisations seem to think otherwise. In December, the International Monetary Fund clubbed together with the European Union, Nordic countries, the European Bank for Reconstruction and Development, the World Bank, and others to provide a €7.5bn adjustment programme for Latvia.
Six months on, Latvia’s GDP is forecast to fall by as much as 20pc this year. It nonetheless battles to defend the lat. The IMF is looking for almost $1bn of further budget cuts, about 3.5pc of Latvia ’s GDP, to reduce the budget deficit to 7pc of GDP. Latvia is being crucified on its exchange-rate peg.
It is paying in part for the sins of Swedish banks. They invested in the Baltic economies in the years of credit and property booms and unbridled optimism about the region’s prospects. The fixed exchange rate and currency board system of each Baltic republic made the Swedes sanguine about exchange-rate risk.
But as with Argentina’s one-to-one peso dollar rate in the 1990s, the currency board system has proved disastrous. It invited a Baltic boom as capital flowed in and a Baltic bust as it flows out. Sweden now risks sharing in that bust. This week the central bank drew down a loan of €3bn from the European Central Bank. But Swedish banks, too, must face up to their mistakes.
In the 1990s, the IMF kept supporting Argentina ’s fixed exchange rate during years of unbroken recession and worsening debt problems. It is repeating the mistake in Latvia. The sticking plaster will cost a lot of money – and eventually waste it. The fund and its allies would all do better to be brave. There is no chance of healing until they do.
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