Compare (Reuters, March 25):
“It was made clear to our Latvian friends that if they want to join the euro, they should not provide a haven for Russian money exiting Cyprus,” a euro zone central banker said.
Unable to benefit from currency depreciation, the peripherals have been urged to seek other ways to improve their balance sheets by means such as ‘internal devaluation’ — regaining competitiveness by lowering costs, particularly wages.
One of the criticisms of “internal devaluation” is that it’s a slower method of improving competitiveness than an old fashioned currency devaluation. There are also questions about whether it even works. Read more
Reuters is reporting that Poland’s central bank stepped into the spot market for the fourth time in less than three months on Wednesday to help support the zloty versus the euro, which was once again nearing levels last seen in 2009.
But the Bank’s intervention seems to be ever less detectable in terms of price trends: Read more
So, bondholders (if they “agree”) will give Greece more of a fighting chance to tackle its debt burden. But Greece will also have to pull its own weight.
Without its own currency, what is the best course of action? John Major, former UK prime minister, proposes (in Thursday’s FT) a strategy akin to Latvia’s ‘internal devaluation’: (emphasis ours) Read more
Greece and other stricken countries will have faster and easier access to tens of billions of euros in European Union funds under a plan to help stimulate their economies, the FT says. The plan, to be unveiled on Monday, would not involve extra assistance but would ease co-financing rules for Greece, Ireland, Portugal, Hungary, Latvia and Romania so that they would not have to put up as much of their own cash in order to collect EU funds. According to internal calculations, the six countries could see their co-financing costs reduced by about €3bn ($4.3bn) over the next two years. But officials hope the plan will have a much bigger impact by unlocking tens of billions of euros in EU funds, which many of those governments are entitled to but have struggled to claim. Read more
In 2008-2009, a sovereign crack commando unit was sent to debtor’s prison by a bond vigilante court for a crime they didn’t commit.
(Well, actually, private-sector balance sheet losses, exchange rate collapse, all sorts of dubious government decisions, that kind of thing — still hard to say who committed what, bit of a mess really.) Read more
Here’s an interesting datapoint unearthed up by BNP Paribas’ emerging markets deak on Monday.
The Latvian interbank rate — Rigibor — is trading through Euribor for the first time in four years… Read more
The European Union’s banking stress tests cover 91 banks in 20 countries. Seven of those financials are Nordic — but none of them are Norwegian, reports FT Alphaville. Norway is of course, not a member of the EU, but it keeps close ties, and seems to have had the option to participate in the tests — if it wanted. Only, it really didn’t. The head of the Norwegian FSA, a Mr Bjørn Skogstad Aamo is quoted in Thursday’s Dagens Naeringsliv saying there was “no national need” for its banks to participate in the stress test. Read more
Risk — the magazine that first reported the story of Goldman’s Trojan currency swaps — has done some digging into how the Latvian capital of Riga managed to “lay their hands on spending money without reporting it as debt”:
When the Latvian government told Riga it couldn’t borrow the equivalent of $1 billion to build a bridge over the river Daugava in 2005, Deutsche Bank stepped in. Its solution – enhanced vendor financing (EVF) – would provide the money in a series of payments, allow the city a five-year grace period before repayments start this year and not need to be reported as debt, the bank claimed. The downside was the expense: 46% of the total 567 million lati bill for the bridge was interest. Read more
And having on Thursday noted the widening spread between Greek government bonds and German bunds, a basic measure of the risk premium investors want in exchange for holding Hellenic debt, we feel the need to repeat the question. Read more
The Global Property Guide’s quarterly house price report was published on Wednesday offering some sobering statistics on global real-estate prices in the third quarter.
To wit, the fact that “price falls in several countries have been much larger than house price rises anywhere and include unprecedentedly severe falls in Latvia (-59.7% year to date), the UAE (-48.1%), Bulgaria (-28.7%), Iceland (-21.2%), Russia (-19.5%) and Slovakia (-15.3%) (all figures inflation-adjusted).” Read more
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. Read more
Markit’s Gavan Nolan wrote this CDS report
A sense of foreboding enveloped the credit markets last week. A plethora of economic indicators – leading and lagging – gave investors cause to question the V-shaped recovery being priced into credit spreads. The Markit PMI reports, particularly the UK Manufacturing PMI, suggested that the nascent recovery was already losing momentum. In the US, the ISM Manufacturing Survey – a similar report to the PMI – also disappointed. Investors feared the worst ahead of September’s US non-farm payrolls report. But the 263,000 jobs lost and 9.8% unemployment rate surpassed even the worst expectations. “Jobless recovery” became the latest entrant to the economic lexicon.
Sections of the commentariat became more vocal in declaring that the “V” was illusory; “W” was the letter future students would see in their GDP charts. But they moved on to the back foot quicker than they could have imagined after another set of leading indicators pointed towards an exit from recession. The Markit UK PMI for the services sector painted a different picture than its manufacturing counterpart, showing the strongest rise in activity since September 2007. The performance of the US ISM services index was not quite as impressive, but the 50.9 reading was again better than expected and the first month of expansion in nearly a year. Unsurprisingly, spreads tightened on the news. Read more
A quick overview of the situation facing CEE on Wednesday:
- The government’s latest debt auction fell flat on Wednesday, with investors picking up only 2.04m of the 24m lats worth of debt on offer.
- Five-year credit default swaps for Latvia CDS widened to 513.8 bps from 479.8 bps the day before.
- The country still has to pass fiscal reforms necessary to meet IMF conditions for aid.
- Fitch has warned the country risks a further ratings downgrade.
- Government: one administration already lost, latest coalition reportedly cracking up. Read more
On Tuesday, we reported that Latvia’s government was taking legislative steps to change the sums lenders could collect on outstanding mortgages to better reflect the current market value of the properties.
We argued this was probably a move to sidestep the need for devaluation of the local currency — the lat. Read more
Economic troubles have been bubbling away in Latvia for months, but the country’s government has so far stood strong in the face of rising pressure to devalue the currency to help mitigate some of the negative economic effects.
At the weekend, though, the clearest signals yet emerged that the country might be about to buckle: the government announced it was making budget cuts of 225m lats rather than the 275m lats expected, a clear contravention of its agreed terms with the IMF, which stipulated a cut of 500m lats. Read more
Latvia’s parliament failed to pass a critical property tax hike plan on Thursday which was closely connected to conditions agreed with the European Union and International Monetary Fund for its €7.5bn bailout.
Analysts are now worried the vote’s failure could reflect a major crack in the government coalition, threatening Latvia’s defence of its euro peg. As can be seen in the Finance Ministry’s letter of intent, there’s still an extensive list of measures and conditions Latvia has to meet to qualify for financing. Read more
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. Read more
The governor of the Bank of Latvia, Ilmars Rimsevics, took a heroic stand on CNBC Wednesday morning, rubbishing all talk of potential devaluation and accusing anyone of having suggested as much of being hugely misguided on the subject of Latvia, probably not even knowing the capital of the country is Riga.
Some choice quotes: Read more
S&P on Monday cut Latvia’s credit rating for the fourth time in a year as the country revealed its economy shrank by a fifth in the second quarter. The downgrade highlights the plight of the Baltic region amid the EU’s deepest recession. S&P cut Latvia’s sovereign rating one notch to junk status from BB+ to BB, and downgraded neighbouring Estonia to “A-”. Latvia is the only one of the three Baltic states to have so far turned to the IMF for help but Lithuania has admitted it may have to follow suit after suffering a 22.4% in second quarter GDP. More detail on FT Alphaville. Read more
It’s only Monday, but Latvia is already having a poor week.
First up: a whopping decline in GDP. The country’s gross domestic product shrank by 19.6 per cent in the second quarter compared to the same period a year ago, according to an estimate by the Latvian statistics office. Economists surveyed by Bloomberg had been expecting a decline of 22 per cent, but a near 20 per cent fall is nothing to sneeze at. Read more
Here’s an interesting story from Reuters on Latvian banks (our emphasis):
LONDON, July 23 (Reuters) – Banks in Latvia have fallen short of the central bank’s reserve requirements since late June, with the daily shortfall hitting as much as 234 million lats ($473.2 million), central bank data shows. Read more
Latvia is back in the headlines as talks between the government and the IMF over its second loan instalment continue to flounder over differing budgetary views.
The analyst community is now interpreting the deadlock as yet another possible chink in the armour of Latvia’s euro-peg defence. Here, for example, is the latest from RBC Capital Markets’ emerging markets team: Read more