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Latvia could go bankrupt in two years

Latvia could go bankrupt within two years, said the Centre for Strategic Research, Russian business portal rus.db.lv writes.

Baltic States will be the first victims of the financial crisis among the countries with transitional economies. Even if the International Monetary Fund will be able to save the region, avoiding prolonged stagnation is still not possible.

Center for Strategic Research has prepared a review of «The impact of the crisis on developing countries and countries with transitional economies”, writes Infox.ru.

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It includes Baltic countries among the states with negative payment balance and heavily dependent on foreign capital flows. The economy in the region grew at the expense of low level of debt accumulation by population. The authors of the report argue that the states have tied themselves to the U.S. economic cycle, allowing the rapid increase in private sector borrowing in foreign currency.

Distinct signs overheating economies of the Baltic republics emerged a year ago, according to the survey. Rating agency Fitch analyst Ed Parker explained that the agency has lowered ratings of Latvia three times, Lithuanian twice and Estonian once since August 2007.

«The outlooks for all three countries are negative», - he added.

«The negative outlook means the chance of reducing the rating over the next three to six months», - reminded the representative of the agency.

The entry to the European Union in 2004 led to a sharp increase in borrowing and as a result the companies have started to actively develop the mortgage, construction and retail spheres.

According to the survey, the loans of Latvian private sector make up 125 pct of GDP and loans of government 9 pct of GDP, amounting to USD 40 bln. The experts are waiting Latvian households to bankrupt massively in next two years.

70 pct of deposits and 90 pct loans in Latvia are issued in euros, but Latvia won’t join euro at least until 2010. The exchange rate is fixed, but the effect of devaluation on small economies after 13-15 years of fixed exchange rate could be very destructive (as in Russia in 1998), explained the survey.

The volume of foreign debt in the Baltic countries is growing rapidly, as well as the size of related payments to the international reserves.

In 2008 the number of bankruptcies of commercial firms increased nearly twice, and the number of finished industrial products for the year fell by 12.7 pct, returning to the level of 2004. Woodworking companies, furniture factories, plants construction and development companies were particularly affected.

“Production has gradually moved from the Baltic states to the countries which are less prone to recession - Russia, South-East Asia,” specified the materials of TSSR.

“I do not envy the Baltic countries. Latvia has the worst position in EU, Lithuania is slightly better. These are countries with very weak economies,” said the head of the department of international economic relations at the Higher School of Economics, Vladimir Pankov.

According to him, they do not have any strong industrial base.

The Center for Strategic Research thinks that the IMF’s aid package to Latvia is very difficult to implement, especially the fiscal part.

IMF’s program provides, inter alia, reducing the budget deficit in 2009 to 7 pct of GDP. 33 pct of the compensation plans to attract at the expense of increasing the VAT and excise taxes, 66 pct - by reducing costs and salaries, including 25 pct in the public sector.

The authors of the review warned that even if the program is implemented successfully, it’ll likely lead to the suppression of domestic demand and a long period of stagnation in the Latvian economy.

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Hi,

I think this report, whilst basically along the right lines, is possibly a little misleading.

"According to the survey, the loans of Latvian private sector make up 125 pct of GDP and loans of government 9 pct of GDP, amounting to USD 40 bln. The experts are waiting Latvian households to bankrupt massively in next two years."

This is surely the case. But this is only half the problem. The other half is the bank bailout, especially Parex, which will take debt to GDP from under 10% in 2008 to nearly 50% in 2010, even on the most favourable scenario, and not counting bailouts for the household loan defaults. So slippage is more or less inevitable.

Latvia was *both* a Spain (CA deficit and construction boom) and a mini Iceland (offshoring, and assets/liabilities mismatch). The two together is very serious, though I personally wouldn't want to put a timescale.

The IMF report say this:

“Finally, standard debt sustainability analysis may not capture all of Latvia’s characteristics, given its dependence on foreign bank borrowing for credit intermediation and its role as an offshore financial centre. First, Latvia’s net foreign debt is much lower (around 70 percent of GDP), as it reinvests many of the non-resident deposits in assets overseas. The value and liquidity of these assets then becomes key. Second, much of its foreign borrowing is backed by domestic assets. Thus external debt sustainability will depend on whether these assets recover value and will be able to generate future returns to service the debt.”

Basically, Valdis Zatlers said the contraction might be more than 5% this week, which means there is a lot of potential downside here, and

"but Latvia won’t join euro at least until 2010."

The credit downgrades and government debt which may rise over 60% of GDP make it hard to see Latvia fulfilling the necessary criteria for this.
~Edward Hugh [29.01.2009, 13:29]
"For me the discussion ends here...those who understand, they understand, those who do not want, they don't..."

funny bunny,

just stop here to indoctrinate the readers with with spreading your opinionated and arrogant jurisprudence.

You're not favour yourself with that.

Ofcourse there are differences when a state or a private person files bankruptcy or, as well every bankrupt case is different, since (at least in Europe) we are talking here about single cases.

Just go to missbimbo.com and relax a bit there, funny bunny.
~knut albers [29.01.2009, 12:44]
You see, Denxel, you too are obsessed with this principle, which is an opposing principle to the one I put forward. I'm not really surprised that you bring out extreme examples like Zimbabwe and USSR, it's just to throw sand in your own eyes. We are talking about for instance Latvia, which has a very high level of infrastructure and education. I am not playing semantics, i am trying to introduce c r i t i c i s m of the idea that a state's economy is 100% comparable to a private persons economy...if you cannot handle that you really need to sit back and think.
For me the discussion ends here...those who understand, they understand, those who do not want, they don't...
~Funny bunny [29.01.2009, 00:28]
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