Moody’s said on Thursday it was ready to stand by its investment-grade rating of Latvia, but only while international financial bodies continued to provide extraordinary financial support to the country.
In its annual sovereign credit report of the country, the rating agency said it was concerned Latvia’s economy might struggle to rebound in the current environment. In short, if not for international financial support, Latvia’s rating could be several notches lower.
On the matter of currency devaluation, meanwhile, Moody’s agreed the issue remained a risk but said it was not part of the its central scenario for the country. Nevertheless, Moody’s did note that the alternative currently being prescribed was growing in controversy. As they put it:
“The stabilisation programme is highly controversial as it retains the fixed exchange rate instead of opting for a devaluation because of the high euroisation of the banking system,” says Orchard. “Although devaluation speculation has largely subsided since June, pressure could re-emerge in 2010 if the economy fails to rebound.”
The reason for the controversy, of course, is that to counter the effects of clinging to a fixed exchange rate quickly becoming unmanageable, the government has had to implement a sweeping array of public sector wage and pension cuts.
And yet, as it emerged last month, the governor of Latvia central bank Ilmars Rimsevics — the staunchest defender of the currency peg — was still earning more than his US counterpart Ben Bernanke. Reuters reported the story:
The debate over Rimsevics’ salary began with local media highlighting that he earned more than U.S. Federal Reserve Chairman Ben Bernanke. “Mr Rimsevics has reduced his salary a bit, but nowhere near as much as salary cuts have affected others in the state sector,” Prime Minister Valdis Dombrovskis told commercial LNT television in an interview. The government has cut all public sector salaries this year by up to 40 percent, affecting even the lowest paid workers like teachers, doctors and nurses. It also cut old age pensions by 10 percent and by 70 percent for pensioners who continue to work. It made the cuts to win further funding from the rescue package. The EU transferred 1.2 billion euros to Latvia in late July and the IMF recently gave the green light to a preliminary deal that should open the way to more funding from it.
Related links:
Latvia’s not for turning – FT Alphaville
Latvian banks face reserve shortfall – FT Alphaville