Latvia has been urged to devalue its currency or risk the collapse of its economy
Latvia is in danger of becoming the first European Union member to face total economic meltdown, experts have warned.
The tiny Baltic state's government has been urged to devalue its currency or risk the collapse of its economy – despite fears such a move could cause turmoil elsewhere in Europe.
Although devaluation would damage Latvia's ambitions of joining the euro, financial analysts said it was the only hope of avoiding a catastrophe after an international bail-out failed to reverse the country's fortunes.
Related Articles
Mandelson: Britain will join euro
Latvia spends 'staggering' amount defending currency
Latvia in crisis talks over bail-out
Latvia cuts spending to secure bail-out
Latvian debt crisis shakes Eastern Europe
IMF contradicts Alistair Darling's growth forecasts in Budget 2009
Timothy Ash, head of emerging market research at the Royal Bank of Scotland, said it had already seen its economy shrink 18 per cent in the first three months of the year.
"They are merely delaying the inevitable," he said "The IMF medicine hasn't worked. I don't see a way out for these guys. You have an economy that is hugely recessed. How is it going to grow?" "Without a devaluation, you end up in the same place. It just takes longer to get there."
Latvia is trapped in a situation similar to Britain on the eve of its Black Wednesday withdrawal from the Exchange Rate Mechanism in 1992, but on a greatly magnified scale.
Experts say devaluation would mean the central bank would not have to spend its fast-dwindling reserves and could speed an economic recovery, as it has elsewhere in eastern Europe.
Even so, the financial pain for the many Latvians who have borrowed in euros would be so severe it is unlikely that Enars Repse, the country's finance minister, would take the option.
Devaluation could also force Latvia's Baltic neighbours into abandoning their currency pegs to the euro and threaten the future of Swedish banks that leant heavily in the region. The resulting panic could also destabilise other troubled economies in eastern Europe.
Morten Hansen, head professor of the Stockholm School of Economics in Riga, Latvia's capital, said: "There is a definite fear that if you have devaluation in one country you could see it spread and not just within the region. One can think of it as a Pandora's Box."
Latvia this week announced an emergency austerity programme it hopes will persuade the International Monetary Fund to resume a frozen bail-out package.
The emergency funding, worth £6.4 billion, is the country's sole financial lifeline but was suspended in protest at the government's failure to reduce spending. Valdis Dombrovskis, Latvia's prime minister, says that, without the cash, the country could go bankrupt this month.
Latvia's descent into financial chaos is the result of a cocktail of fiscal imprudence, irresponsible lending and a failure to recognise the signs of an overheating economy, economists say.
Between 2005 and 2007, Latvia's economy expanded faster than anywhere in Europe, recording double digit growth three years in a row. Freed from the strictures laid down to achieve accession into the EU, which Latvia joined in 2004, the private sector borrowed with abandon.
As the economy boomed, the Latvian government increased the number of civil servants dramatically and paid many of them more than their counterparts in the private sector.
When the global financial crisis struck, drying up credit lines, Latvians' borrowings amounted to 137 per cent of Gross Domestic Product, more than anywhere else in Europe.
Riga's skyline now bears testament of a boom turned to bust. Cranes towering over the city's elegant art nouveau façades lie idle. Newly built luxury apartment blocks lie empty, even though property prices have fallen 50 per cent.
But the recklessness was not just on the part of the Latvians. Swedish banks saw untapped markets and happily moved in, lending without question as they watched their profits soar.
When Zinta Vitinja wanted to open a dairy farm outside Riga, a Latvian agricultural bank turned her down because she lacked sufficient collateral. But Swedbank were much more easily persuaded.
The crisis struck and Mrs Vitinja was unable to meet her repayments. Her cows have now been slaughtered and her family home repossessed.
Many Latvians fear they could soon be in the same position. Over 200,000 households – a large proportion in a country of 2.4 million people – have mortgages, 90 per cent of which are denominated in euros and held by Swedish banks.
With the Lat heavily overpriced, any devaluation could lead to massive defaults, bringing misery to many Latvians and threatening the balance sheets of the Swedish banks.
Some Latvians are already stashing euros under their mattresses and speaking fearfully of Argentina where, during a similar crisis in 2001, police searched homes to force citizens to change hoarded foreign bank notes back into local currency.
Although devaluation would damage Latvia's ambitions of joining the euro, financial analysts said it was the only hope of avoiding a catastrophe after an international bail-out failed to reverse the country's fortunes.
Related Articles
Mandelson: Britain will join euro
Latvia spends 'staggering' amount defending currency
Latvia in crisis talks over bail-out
Latvia cuts spending to secure bail-out
Latvian debt crisis shakes Eastern Europe
IMF contradicts Alistair Darling's growth forecasts in Budget 2009
Timothy Ash, head of emerging market research at the Royal Bank of Scotland, said it had already seen its economy shrink 18 per cent in the first three months of the year.
"They are merely delaying the inevitable," he said "The IMF medicine hasn't worked. I don't see a way out for these guys. You have an economy that is hugely recessed. How is it going to grow?" "Without a devaluation, you end up in the same place. It just takes longer to get there."
Latvia is trapped in a situation similar to Britain on the eve of its Black Wednesday withdrawal from the Exchange Rate Mechanism in 1992, but on a greatly magnified scale.
Experts say devaluation would mean the central bank would not have to spend its fast-dwindling reserves and could speed an economic recovery, as it has elsewhere in eastern Europe.
Even so, the financial pain for the many Latvians who have borrowed in euros would be so severe it is unlikely that Enars Repse, the country's finance minister, would take the option.
Devaluation could also force Latvia's Baltic neighbours into abandoning their currency pegs to the euro and threaten the future of Swedish banks that leant heavily in the region. The resulting panic could also destabilise other troubled economies in eastern Europe.
Morten Hansen, head professor of the Stockholm School of Economics in Riga, Latvia's capital, said: "There is a definite fear that if you have devaluation in one country you could see it spread and not just within the region. One can think of it as a Pandora's Box."
Latvia this week announced an emergency austerity programme it hopes will persuade the International Monetary Fund to resume a frozen bail-out package.
The emergency funding, worth £6.4 billion, is the country's sole financial lifeline but was suspended in protest at the government's failure to reduce spending. Valdis Dombrovskis, Latvia's prime minister, says that, without the cash, the country could go bankrupt this month.
Latvia's descent into financial chaos is the result of a cocktail of fiscal imprudence, irresponsible lending and a failure to recognise the signs of an overheating economy, economists say.
Between 2005 and 2007, Latvia's economy expanded faster than anywhere in Europe, recording double digit growth three years in a row. Freed from the strictures laid down to achieve accession into the EU, which Latvia joined in 2004, the private sector borrowed with abandon.
As the economy boomed, the Latvian government increased the number of civil servants dramatically and paid many of them more than their counterparts in the private sector.
When the global financial crisis struck, drying up credit lines, Latvians' borrowings amounted to 137 per cent of Gross Domestic Product, more than anywhere else in Europe.
Riga's skyline now bears testament of a boom turned to bust. Cranes towering over the city's elegant art nouveau façades lie idle. Newly built luxury apartment blocks lie empty, even though property prices have fallen 50 per cent.
But the recklessness was not just on the part of the Latvians. Swedish banks saw untapped markets and happily moved in, lending without question as they watched their profits soar.
When Zinta Vitinja wanted to open a dairy farm outside Riga, a Latvian agricultural bank turned her down because she lacked sufficient collateral. But Swedbank were much more easily persuaded.
The crisis struck and Mrs Vitinja was unable to meet her repayments. Her cows have now been slaughtered and her family home repossessed.
Many Latvians fear they could soon be in the same position. Over 200,000 households – a large proportion in a country of 2.4 million people – have mortgages, 90 per cent of which are denominated in euros and held by Swedish banks.
With the Lat heavily overpriced, any devaluation could lead to massive defaults, bringing misery to many Latvians and threatening the balance sheets of the Swedish banks.
Some Latvians are already stashing euros under their mattresses and speaking fearfully of Argentina where, during a similar crisis in 2001, police searched homes to force citizens to change hoarded foreign bank notes back into local currency.
Posts
0 comments:
Post a Comment