The Baltic states plight may seem irrelevant here but it illustrates clearly the dangers we face. S&P have already warned that unless we take drastic action to cut our deficit our own debt rating could also be cut. Of course not being in the euro we have the cushion of a floating exchange rate to take some of the strain unlike Latvia, Estonia and Ireland (don’t forget Ireland! ) . But here you can see that the EU puts the defence of the 100% monolithic integrity of the euro above the sufferings of small member stastes.
The second piece shows the vast extent across the EU of support given to the banks. The destruction of economic strength in Europe continues apace and it is doubtful, indeed most unlikely, that the West’s relative prosperity will ever match that enjoyed hitherto.
Christina
TELEGRAPH
11.8.09
S&P downgrades Baltic states' debt ratings
The sovereign debt of Latvia and Estonia have been downgraded as the brutal slump plays havoc with public finances and tests commitment to euro currency pegs across the Baltic states.
By Ambrose Evans-Pritchard
Standard & Poor’s, the credit-rating agency, cut Latvia’s rating to “BB” and warned that its economy will contract by a further 16pc this year. The public debt will vault from 19pc of GDP last year to 80pc by 2011. “This very fast increase in debt is unprecedented,” said Moritz Kraemer, S&P’s head of sovereign ratings.
S&P said the country is facing a “struggle” to find a path back to growth while also maintaining its currency peg, but the agency stopped short of advising whether devaluation would help.
There is an intense debate in the Baltics over whether the euro pegs are themselves causing an unnecessarily harsh adjustment, entailing salary cuts of up to 20pc. The International Monetary Fund had privately suggested a devaluation in Latvia to help cushion the blow, but this was overruled by the European Union on grounds that most of the country’s corporate and mortgage debt is in foreign currencies. [Note! These countries are not IN the euro but the EU still determines their currency relationships because they have ‘pegged’ their currencies to the Euro. So to suit the core EU countries the Baltic states must suffer cuts in their national prosperity unimaginable to us. Much the same is happening in Ireland but the British press has decided ‘not to notice’, ! -cs]
GDP has fallen 20pc in Latvia and 22pc in Lithuania over the past year – more concentrated falls than anything seen in the Great Depression. Both countries expect unemployment to peak at almost a quarter of the workforce.
Valdis Dombrovskis, the Latvian premier, said there were signs of stabilisation. “I am convinced that the economic indicators will improve next year.” The IMF, the EU and the Nordic states have helped Latvia with loans equal to 30pc of GDP but the benefits are being eroded by capital flight. Nordic banks are rolling over “considerably less” than 100pc of the cross-border loans to their subsidiaries as they adjust to rising defaults.
Latvia has swung from a huge current account deficit into surplus this year, but S&P said the speed of deleveraging is itself “exacerbating the severity of the contraction, with negative implications for asset quality in the local financial system”.
Neighbouring Estonia was downgraded to “A-”. The better grade reflects its flexible economy, fiscal reserves, and a highly-rated currency board, but it too faces currency flight.
EU OBSERVER
11.8.09
EU state aid to banks is one third of GDP
LUCIA KUBOSOVA
The EU's main regulator has approved state aid to banks worth almost a third of the 27-member bloc's GDP - twice as much as predicted earlier, with the highest rescue funds in Ireland and with none paid out in several states of central and eastern Europe.
According to a review published by the European Commission on Monday (10 August), between last October and mid-July 2009, the EU's executive approved guarantee measures designed to boost lenders' confidence worth €2.9 trillion and capital injections for struggling banks which amounted to €313 billion.
The reaction, seen in Europe and beyond, came last autumn as the world got to grips with the worst financial and economic crisis since the 1930s.
According to the principles agreed by EU leaders, the state aid was to restore financial stability and resume credit flows in economy but without unbalancing state budgets or damaging the functioning of the bloc's internal market.
Based on these principles, Brussels filed a set of rules which the commission followed when approving national state aid schemes.
In its June report, Brussels predicted that public aid to the banking sector would cost Europe up to 16.5 percent of GDP while the current figures suggest that several member states might have undermined future public finances in their attempt to save the banks.
"This implies increasing explicit future public debt levels or implicit future debt levels. However, it is too early to judge whether thus far the response of governments to the crisis has been disproportionate," the study said.
For most banks in individual countries, a six month period, initially set as the duration of the aid schemes has ended and it is up to the commission to decide which schemes are eligible for extensions for "reasons of financial stability."
There are deep differences among the member states and the level of their state intervention.
Ireland, one of the EU countries most hit by the financial clampdown, received a green light from Brussels for aid representing 231.8 percent of its GDP and banks have taken up almost the whole package.
In contrast, nine states - Bulgaria, Cyprus, the Czech Republic, Estonia, Lithuania, Malta, Poland, Romania and Slovakia - have not applied for permission to use public funds for such purposes.
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