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.
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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…
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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.
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… Current account has been balanced, inflation is falling back, foreign debt will not exceed 60% of GDP, which is a Maastricht criteria level… Our current account deficit is not in double digits… This is not because the overvalued currency, but because of huge lending… We just need to have more communication…
Latvian year to date trade deficit is LVL -145mn including both goods and services. Its income balance (the rest part of current account) was LVL -300mn in 2008, and the last time it was positive in 2002. But mysteriously, income deficit reversed to a surplus this year! How? Why? What affects? Mr. Rimsevics, can you please communicate on this topic?
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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:
1. Hot money effect
2. Current account deficit
3. Reserves/ M2 + Gross external debt coverage
4. Low competitiveness
5. Parex Bank… and international relations
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Swedbank and Latvia are major friends today. If you listen to someone speaking about Latvia just wait a few moments and you will enjoy expressions about Swedbank. Or other way, if someone is articulating about Swedbank, she will certainly stick few words about Latvia. Causality is uncertain but base is obvious: Swedbank and Latvia are major problems of each other. Latvian currency is losing value, Swedbank – confidence.
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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.
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