SSE.LT

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.

There were few topics on SSE.LT discussing devaluation in Latvia:

The fixed currency model of bank collapse: Baltics on target, July 30, 2008.

A Few Ideas About Baltic Currency Devaluation: It Happens, November 15, 2008.

The devastation is not in the toilets, but in heads, April 23, 2009.

The conspiracy of IMF and Latvia, September 11, 2009.

The conspiracy of IMF and Latvia: part 2, legal preparation, October 6, 2009

Basically what has changed since the first post is Swedes perception in Latvian risks. Or at least their public recognition of high devaluation probability. But what is dramatically pity – Latvians has not changed: neither fundamentals nor perception. Latvian government is very reluctant about their future. And this pisses Europe off.