Global Economics

Shrinking Economic Options in Latvia


Amid plunging real estate values and a rising budget deficit, Latvia is fighting to resist a devaluation of its currency

It could have been, it should have been, and it was one of the few bright moments in the darkness of a deep economic crisis. Over 500 blondes paraded through downtown Riga led by the Latvian Mrs. Universe, Marike Gederte, who stood at the head of a new movement that wants to make 31 May the national blonde holiday (and raise awareness and funds for a children's charity).

The graceful and radiant young women walked through the city center and, according to witnesses, really did put a smile on the faces of those Latvians present, so sullen these days due to the increasingly dramatic course of the economic crisis. Accompanied by an orchestra, the parade of fair-haired girls, the majority pink-clad, ended in a shopping mall with a fashion show.

It was probably the last bit of good news Latvians will be able to savor for a long time. It was followed in the next few days by announcements from real estate agencies that as of the end of March the price of flats in Riga had fallen about 50 percent compared to the previous quarter. As the majority of Latvians already have loans from past years of plentitude—the vast majority payable in euros—falling property values will please hardly anyone. On top of that, speculation has arisen about the possible devaluation of the national currency, the lat, which is, for now, firmly bound to the euro.

For indebted Latvians, households as well as businesses, devaluation would come as a retroactive blow ahead of a definitive fall into the depths of a long-term depression. The center-right government and central bank have been fighting tooth-and-nail to hold the lat's exchange rate, at the cost of drastic budget cuts and the loss of more than a third of the country's foreign reserves. Devaluation would mean that plenty of people and companies simply would not be able to service loans they are already struggling to pay back.

DEEPENING DEFICIT

The pressure on the lat and on Latvia is great—ratings agency Standard & Poor's said 8 June it might downgrade the country—and in this situation the comparison between speculators and scavengers isn't by any means a cliché. But the head of the central bank, Ilmars Rimsevics, and his predecessor Einars Repse (a former prime minister and the current finance minister), are stubborn and don't want to back down. Prime Minister Valdis Dombrovskis is a bit of a puppet in the hands of these "currency hawks" and constantly and patiently continues to defend all the budget cuts, such as the 30 percent drop in state employee salaries. These economists see the country's salvation in maintaining the Maastricht criteria (including the 3 percent ceiling on the budget deficit-to-GDP ratio) and adopting the euro.

The International Monetary Fund and the European Union, Latvia's saviors last winter through a large loan, have remained silent about the Dombrovskis cabinet's proposal to raise the budget deficit. The 5 percent level forecast last fall is already unrealistic. Both creditors have already quietly conceded to 7 percent; the latest estimate puts it at more than 9 percent.

"The next three months will decide about the success of our cuts," Dombrovskis told me several months ago, as he was taking office. The situation is, if anything, worse (this year's overall fall in GDP is now estimated at 20 percent), and, according to analysts, this week will be crucial in the decision whether to devalue the lat.

No one, however, knows how far the subsequent tsunami, contagion, or mere wave from such a move would spread: if only the surrounding Baltic states would be stricken, or all of Central and Eastern Europe. The Czech Republic also lent the Latvians money to help manage the crisis. Nothing then remains but to cross one's fingers for economic hardheads such as Ilmars Rimsevics and wish the blondes a lot of good ideas. They will need them.

Provided by Transitions Online—Intelligent Eastern Europe

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