FT Alphaville is (as ever) on Latvian currency intervention and devaluation watch, this Monday morning.
Last week, the Latvian government agreed to cut its budget deficit — to help stave off a full-blown currency devaluation, while satisfying demands from the IMF and EU. Both these organisations are due to return to Latvia in early November for a second review of its loan programme to the Baltic country. They’ll be expecting the local government to have seriously tightened up on fiscal policy, with a sharp eye on budget cuts.
In the meantime, here’s a reminder from Deutsche Bank analyst Gillian Edgeworth about the importance of potential currency intervention:While fiscal policy is clearly the primary pressure point at this stage, should the central bank be forced to return to market interventions and sell further EUR in the market, it would serve to intensify pressures. The central bank releases detail on weekly intervention amounts every Monday morning for the previous week. According to its data, it has not sold EUR in the market since early June. At the peak of tensions in early June it sold EUR235mn within one week.
Scratch that.
A quick glance at the website of the country’s central bank — Latvijas Bank – shows recent buying and selling of foreign currency (euro) as below:
Which means in the second week of October, the Latvian central bank sold euros for the first time since June, by the relatively paltry amount of €15m.
As a reminder, Latvijas Bank automatically buys and sells euros when their exchange rate against the lat reaches a certain threshold. This is what the bank says:
Since January 2005 Latvijas Banka unilaterally supports the lats and euro exchange rate fluctuations within ±1% band around the central or euro peg rate, which is 0.702804 lats for one euro. This means that the interbank market rate can differ, and it usually does differ, from the central rate but cannot go beyond the 1% margin of 0.7098 and 0.6958 EUR/LVL respectively in either direction. When the market rate reaches either of the band’s margins, Latvijas Banka automatically intervenes: responding to the requests of commercial banks the central bank buys or sells the euro for the lats at the border rate.
What we see in the above data is the Latvian central bank selling €15m in the second week of October followed, very swiftly, by the central bank buying €15m of euros the next week.
Does this mark a turnaround in lat sentiment? Probably not:
RIGA, Oct 19 (Reuters) - Latvia’s central bank said on Monday that it bought 15 million euros in net foreign exchange interventions last week, selling lats.
The lat currency opened stronger against the euro. Dealers said last week that trade was being mostly influenced by the need for local business to pay payroll and VAT taxes to the tax revenue board by the 15th of the month, increasing demand for lats.
In early trade, the euro was quoted at 0.7071/91 lats compared to 0.7088/98 last Monday. Overnight lending rates have also stayed low. The central bank passively intervenes to buy lats when the euro hits 0.7098 lats, the top end of its 1 percent fluctuation band based on a central rate of 0.7028 lats.
The central bank announces interventions on Monday for the previous week, including on the Reuters page.
In the week before last, the central bank had sold 15 million euros, buying lats.
The other main factor that helped calm the markets over the last week and reduce pressure on lat was the government’s backdown on its plans to make smaller-than-agreed to cuts to its 2010 budget.
On Friday, Prime Minister Valdis Dombrovskis announced some more details of new taxes to boost revenue for the 2010 budget as part of efforts to win approval from international lenders.
Latvia is relying on a 7.5 billion euro rescue package, but the recession-hit country needs international lenders’ approval for the 2010 budget if it is to receive further tranches from the package.
Meanwhile noise about devaluation — albeit from the Swedbank CFO — continues (in poor English translation):
[The Baltic Times] RIGA - Latvia could arrange a controllable lat devaluation, such a statement was made by Swedbank finacial director Erkki Raasuke in the interview to a Swedish newspaper Dagens Industri. In his opinion, the effect of the uncontrollable devaluation would be wrecking, but the devaluation as a part of ERM-2 currency exchange mechanism could be easily controlled.
Raasuke thinks, that 15% devaluation could be realized with the assistance of International Monetary Fund, EU and Scandinavian countries, taking in mind all delicacies the of this proccess.
The analyst agrees with the popular among Swedish banks opinion, that in the near-term prospect lat devaluation can induce serious problems, nevertheless, the overall size of the losses will not be bigger, than in the case of saving the current course.
We think that means that although such a devaluation would trigger instant credit losses for banks with Latvian exposure, the Swedbank CFO thinks those losses would ultimately not be any bigger than losses generated by Latvia’s current (devaluation-averse) course.
Related links:
On the matter of renewing confidence in the Latvian economy - FT Alphaville
Defcon Latvia, again - FT Alphaville
