Latvia is poised to devalue its currency at least 15 percent by the end of 2010 to boost exports and cut the budget gap as the economy contracts at the fastest pace in more than a decade… deficit may grow to a record 10 percent of the economy this year, twice the initial 5 percent target set last year by international agencies that provided a 7.5 billion- euro ($11.2 billion) bailout loan. Latvia may already have taken the first step toward devaluation after an announcement on Oct. 6 that the government was considering rules to cap mortgage holders’ liability, which would help limit losses from a devaluation.
More and more scary bells each week are coming from Latvia. After the announcement the yield on sovereign bond due 2018 rose almost 1 percentage points, CDS jumped >20%. In last two weeks Latvian central bank had zero net intervention in FX market. Would be ridiculous for Mr. Rimsevics to spend another billion euros on defending currency. Probably he will not. Creditors would be flamed out otherwise.
Finance Minister Anders Borg has had talks with the major Swedish banks and warned of a near economic collapse in Latvia… The international community’s patience is very limited… In secret talks with the Swedish banks have Anders Borg explained the growing pressure that exists within the International Monetary Fund (IMF) to force Latvia to a devaluation… Since it is difficult to safely assess Latvia’s ability to pay and with conditions for recovery, one cannot completely exclude the risk of a major default.
According to translated version of SVD.SE, whatever that could mean. Anyway, one of the major barriers of devaluation could be removed by the Latvian government…
Latvia will probably devalue its currency in the next year since the government may not be able to continue cutting spending in line with its international program… We think it’s more likely than not that Latvia will devalue… [Real effective exchange rate] needs to decline by “about” 25 percent to return to levels in 2004 “when the bubble started to inflate,” Shearing said. The real effective exchange rate has weakened 3.5 percent from its peak. A Latvian devaluation will mean Estonia and Lithuania are likely to follow suit and devalue their currencies…
That’s what Bloomberg released today. Quite a strong message from Capital Economics. Will it raise the next economy run?
Lithuania will sell euro- denominated bonds in less than a month in a second auction this year. The government targets reducing the budget deficit next year and will cut spending and raise taxes by a total of 4.2 billion litai to narrow the gap, Kubilius said today.
4.2bn litas is ~11% of 2008 government revenue or 3.7% of 2008 GDP. If government expenditure multiplier is 1 than GDP of the country will contract 3.7% only from lower public spending. In fact, the decline can be as much as 7% or 10%, as more money is saved in recession than it is spend. And this excludes firms and households consumption.
Lithuania… had its foreign and local- currency debt ratings cut by Moody’s, which cited “severe pressure” on the budget… a reversal of this trend [recession] is unlikely to occur within the medium-term rating horizon… Subdued growth in western Europe will lead to diminished demand for Lithuania’s exports and less foreign investment… Domestic consumption is also likely to be limited by falling employment, wage cuts, a weakened banking sector and government budget consolidation.
A quite unexpected step from the Moody’s, reminding for all those “bottom searchers” where the country is heading. Additionally, statistic department reported consumer confidence index of -40, compared to -47 in August and -26 a year ago.
The surplus will increase because “the goods and services deficit shrank, as well as due to losses of foreign companies and the intake of European Union funds for agriculture,” Rimsevics said today in a statement.The bank will officially
release the data on Sept. 23.
Many thanks are going to Mr. Rimsevics for creating transparency in Latvian accounting. Now we see more of what we would like to see from a country with doubtful currency peg and weak fundamentals. That’s foreign companies’ losses and EU funds that drive rising CA. The question “how sustainable it is” persists. Read the rest of this opinion »
Original memorandum of intent of the government differed from what had been published. Two issues from the published document had indeed been removed at request of the Bank of Latvia and the Treasury. One is related to some information that can put investors into more advantageous position relative to the Treasury in sale of government debt. Another was able to create more benefit for speculative attacks on Latvian Lat. One particular number could harm the whole country interest.
That’s how Wednesday’s Latvian press described the deal between Latvia and IMF.
Today Lithuanian Central Bank reported first ever year-on-year drop in residents wages. Gross wage declined 2.9% in the second quarter of 2009. Compared to the first quarter average wage rate declined 1%, average number of employees fell 4.1%. Thus, real corporate spending on wages contracted 5.1% in the quarter.
Employees in financial, mining and construction sectors experienced steepest declines in salaries. Wages in the sectors declined 4.9%, 10.6% and 22.4% respectively. On the opposite, teachers earned 12.9% more in 2q 2009 than during the same period a year ago.
On Friday, Lithuanian statistics department updated figures on domestic industrial production and transport enterprises activity – the numbers that are less adjustable by interested parties, unlike GDP or sentiment indicators. So, industrial production declined 16% in July compared to the last year, slightly better than last month’s figure, driven by the same size decline in manufacturing. Total goods transportation load reduced by 17%, passengers – by 21% . The numbers compare to the worst 33% and 22% respective falls this year. Despite lower deterioration rate can be interpreted as a “green shoot”, declines are still double digit, while improvements are caused by one-time events or statistical characteristics.
Two of the three Baltic nations saw their economies decline at a slower pace in the second quarter, increasing tentative hopes that the worst may be over in the crisis-hit region… The improving quarter-on-quarter trend bolstered the argument of those who believe the Baltic economies have bottomed out after suffering the deepest recessions in the European Union this year.
Black is white. Baltic States are not so big to moderate their GDP or unemployment figures significantly, unlike the US. Their only tool is to present real numbers in mystery interpretations. Just note what is the current macro environment in the countries:
S&P said it was cutting Latvia’s sovereign rating a notch deeper into junk status from BB+ to BB, citing the “political and economic challenges” facing the country as a result of “rapidly contracting” incomes and the associated pressure on public finances.
Latvia posted real GDP contraction of 19.6% in the second quarter of 2009. That’s the deepest fall in the country’s history. Meanwhile, foreign government debt increased to LVL 3.2bn (EUR 4.6bn). As a result, gross government domestic debt to GDP is set around 20%. To fulfill Maastricht criteria, the ratio can not break 60%. However, it’s not easy any more.
Some time passed since the last post in this blog. One might say – nothing happened in Latvia, despite all the effort of the author, and things are going well. Despite huge drops in real GDP, budget deficit, all those real estate and labor problems, or IMF’s bickering regrading credit – Latvia will eventually get out from the hole. God bless those people. But the Latvian government will not. Neither will the central bank.
Now i started to believe that Latvia’s problems emerge due to lack of reliable official information. Let me explain.
Firstly, on 2 of April the Bank of Latvia (BoL) decided that it would be most convenient for all not to disclose where and how much foreign FX reserves of the country are held. It seems of low importance, BoL says, and will protect the country against the speculative attacks of investors. Yes, right, speculators most probably will invade into the financial system, but primarily due to its shitty fundamentals. Show me somebody who cares about where saving are of Latvia are held? Unless they are distributed to the local banks! This subsequently leads to the second thought.
Check one revealing graph:
This is how Latvia’s FX reserve change in how they should have changed according to the officials. The BoL says they only sold EUR 155mn in March. However, comparably FX reserves dropped more than EUR 1bn. Where do money flow? Nobody knows, I won’t be surprised if Mr. Rimsevics also doesn’t know. But I can assume from the current environment that this money is transfered to troubling local banks. The BoL intervenes into the market not directly, but through those arrogant little institutions, I assume. In exchange of being speechless, the banks could be allowed to use some of the FX reserves to sustain liquidity and minimize panic… Ah right! This money could also be stolen or missed in accounting! This leads us to the third and final (oh thanks) point – accounting in Latvian.
Today the press mentioned that foreign creditors of Latvia decided to audit its budget financial performance. Funny and sad they discovered two things. One – the Latvian government does not have any centralized database of revenue collection, its simply doesn’t know from which sources the money is fulfilling the budget. Two – it doesn’t know how many people are currently working in the government and each ministry in general, thus, the government doesn’t know how it spends its money. But they certainly know that devaluation is not possible and fat Santa Claus will visit them in December. I don’t know how they are going to tackle the crisis – cutting somebodies’ heads?
Encouraged by a message from Bank of America with precise projection of Baltics devaluation I have decided to summarize why the analysts could be right in their estimations. Apart from inflation, economic recession and credit crunch, as stated by the BoA, I would like to stress other interrelated macro economic phenomena, which theoretically should be ended by a change in currency rates. Mainly, these are:
Discussed by John Hempton in Bronte Capital, Baltic banks are insolvent. The reasoning is the following:
Well if the Lati devalues (as would seem inevitable) then Hansa Bank has to pay Euro to Swedbank – and as its assets are in Lati it would be insolvent.
If the Lati doesn’t devalue its only because people (ie Swedbank) are prepared to continue to fund it. This is not pretty at all. All in Hansa owes Swedbank over 30 billion Swedish Kroner – all denominated in Euro and which can’t be paid. The equity capital of Hansa (roughly 7 billion Swedish Kroner) is also going to default.
To protect Baltic economies, firstly, central banks should have enough willingness and reserves to long Baltic currency and short Euro with gold. While the rest of the world is doing vice a versa. Any thoughts who is able to spend more capital: hedge funds or Baltic central banks?
Secondly, people must inject more Euros to Hansabank, SEB and other banks to diminish their loan-to-deposit ratios and make shareholders of Swedbank calm. Any one is willing to buy litas or kronas from the bank and give them all your Euro savings?
Yes, we do! Banks have been clever enough to hedge their currency risks by lending in Euro to residents of Baltic States. And we have been borrowing in Euro, protecting banks and exposing our own assets. The great scheme that has been working until recently, when borrowing capacity was more or less sustainable.
Today, it’s not true. Banks’ credit risks are topping due to bad loans coming from the Baltics. Inflation does not allow to reduce interest on domestic currency denominated loans and decrease demand for Euro. People do not funds banks anymore. Contracting GDP growth is pushing away foreign investors. Consequently, to make their shareholders calm, both Swedbank and SEB should closed down their Baltic branches. Until they will be forced to.
Real inflation in Lithuania reaches 6.0% in first five months of 2008 versus 5.8% officially published. Official data is adjusted by new weights structure introduced in the end of 2007, where food loses some contribution. If we use 1996 initial consumer products percentage contribution to total inflation, YTD CPI level reaches 7.1%, which is 1.3% higher than we are spoke by the department of statistics. This holds if official contributors inflation is taken.
To make matters worse, after conducting a small research on food prices I found another less pleasant number. Real current inflation in Lithuania piked by extra 0.6% during five months of 2008. In total, real inflation in Lithuania gets to 6.6%-7.7% level, depending on one of the several methodologies used by the department of statistics. Somewhat more than 5.8%.
Today is the first time since September 26, 2007, when Latvian currency returned to its unpleasantly low position against Euro. However, if in autumn momentum was rising, this time it is the sharpest one day price drop of Lat against EU currency. In one day LVL depreciated more than 0.5%. Is it only a mystery happening each Friday the 13th or financial markets started to doubt in Lat?
Technically 0.7060 level is important for Lat, as it is a second 1-year lowest LVL-EUR rate. If it is broken, we should expect further depreciation until another important limit to test – 0.7074, which is 0.2% higher than Friday’s closing price. This point was reached when Latvia was flooded with SMS’s containing rumors about Lat devaluation. On short term-graph, resistance line is broken, and probably does not already play any significant role. Technically, the question is whether another 0.7060 is a strong resistance level. Economically, not necessarily.
Monday’s, opening price shall judge this interesting case.
How beautiful is the country of Gibraltar! This is a welcoming piece of nature full of mountains, beaches, fresh air surrounded by relaxing smiles and Estonian exports. Small, but very loyal UK-owned colony is the 8th largest buyer of Estonian products: “mineral fuels, mineral oils and products of their distillation; bituminous substances”.
When was the last time when Estonia cared about Gibraltar so much, but today, when year-on-year GDP growth reached 0.4% in Q1, led mostly by exports, inflation flooded at 11.4%, current account stayed at risky height and relationship with its largest neighbour fell to depth. Proud but debatable behaviour of the Baltics states with Russia, selfish and overconfident, is an appealing topic to examine, especially under speculations about the worst financial crisis Tallinn, Riga and Vilnius can face after gaining our independence. Read the rest of this opinion »
The recent report by McKinsey has identified new financial markets participants, which might unexpectedly affect its development. Petrodollars, Asian center banks, hedge and private equity funds – these institutions, as the report mentions, have obtained a great ability to influence financial markets during the last 6 years. Besides, even under optimistic assumptions, in the same period ahead, the new power brokers might reach the size when other investment funds will have to adopt their behavior according to the new brokers’ actions. Read the rest of this opinion »
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