Roubini: Baltics, Bulgaria next for devaluation
05.02.2009, 09:39 The Baltic nations and Bulgaria may be the
next emerging-market countries to weaken control of their currencies as the
global economy worsens and eastern Europe descends into crisis, New York
University professor Nouriel Roubini said, Bloomberg reports.
“If fundamentals are out of line you cannot maintain a fixed exchange rate,
you’re going to eventually have a currency crisis,” Roubini, who forecast the
U.S. recession two years ago, said in an interview from Moscow today. “The
Baltics are under pressure and Bulgaria’s currency board is under pressure.”
Kazakhstan let the tenge weaken as much as 22 percent today, after keeping it
stable since November by selling foreign-currency reserves. Russia’s ruble,
managed against a basket of dollars and euros, has dropped 35 percent against
the dollar since August, amid sliding commodity prices. The Belarusian ruble,
also controlled through interventions, was devalued by 20 percent in January,
while Ukraine’s hryvnia has lost 40 percent to the dollar in the past six
months.
The currencies of the Baltic states of Latvia, Lithuania and Estonia have
remained pegged to the euro as their economies suffer from a reduction in
foreign credit and waning consumer demand. Latvia’s lats gained 0.7 percent
versus the euro this year, as the central bank maintained its regime of limiting
the currency’s fluctuations to 1 percent either side of 0.702804 per euro.
The Estonian kroon and Lithuania’s litas have barely moved as those countries
maintain their pegs in preparation to adopt the euro. By buying and selling
reserves, Estonia keeps its currency around 15.6466 per euro, while the litas is
held at 3.4528 per euro. This type of fixed currency regime is often called a
currency board.
Bulgaria’s lev is pegged at 1.95583 per euro. The country’s drained 16
percent of its reserves to $16.8 billion in the second half of last year,
according to International Monetary Fund data.
Current-account deficits in the Baltic states and Bulgaria put the countries
at risk of currency crises that may lead to problems in banking and housing,
Roubini said.
“Given the economic conditions are getting worse, these pegs are under severe
pressure and you have the beginning of a currency crisis,” said Roubini, who was
in Moscow for a conference run by investment bank Troika Dialog. “A currency
crisis becomes a banking crisis, a housing crisis, a sovereign debt crisis. It
becomes a corporate crisis because each segment in these economies has a large
amount of foreign liabilities.”
Latvia’s reserves fell 20 percent to $5.3 billion in the second half of last
year, Estonia’s declined 5 percent to $3.9 billion and Lithuania’s slumped 13
percent to $6.3 billion.
“The large current-account deficits, fixed exchange-rate regimes and the
terms of trade shocks -- emerging Europe is a recipe for disaster,” Roubini
said. “The more you try to defend a peg that is unsustainable the more people
attack you and the more you lose reserves.”
Roubini also said the IMF made a mistake allowing Latvia to retain its euro
peg when it negotiated a bailout plan in December. The country will get 7.5
billion euros ($9.6 billion) from a group led by the Washington-based body,
equivalent to about 34 percent of gross domestic product.
“The IMF made a mistake with the Latvia program of allowing them to keep the
peg as it doesn’t make any sense because the currency is overvalued,” Roubini
said.
The IMF “should have, like they did in East Asia and in other emerging-market
crises, made it a condition of the provision of liquidity that they let the
currency move,” he added. “The Baltic currencies are
overvalued.”