SSE.LT

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.

Apart from a list of reporting obligations, Latvia has to do something which is mysteriously hidden from the public. I know nothing about that, but I like guessing. The first  point should certainly be related to limited Latvian government bargaining power in debt issue questions. Real country risk of Latvia must jump to stratosphere, which should be reflected in bond prices. But if IMF doesn’t show that, investors accept risk. By the way, there were several cases last Summer when Latvia was not able to sell debt on open market. They know it is impossible for them now, if real situation is exposed.

The second point, as I imagine it in my bright head, is in one or another way related to foreign reserves, market interventions and Lat nominal exchange rate. In fact, devaluation is one of the main country risk factors, which puts investors into more beneficial position in bonds battle. Thus, I assume IMF kindly asked the Central bank of Latvia to stop market intervention (read to stop buying that cheap evil Latvian currency and spend highly expensive Euros) if they exceed some pre-specified number. 100 million lats a week? 1,000 million? All 7.5 billion offered by IMF? Your guess?

So, is current Latvian exchange rate sustainable? Yes, if all agree. No, if something big, but not necessarily the majority, does not agree. Hopefully, 12 months forward declined 3% from the August peak.

Lat 12 months forward rate