Latvia’s lat currency is up on Monday following reports the government staged a major defence of the country’s euro peg last week.
Nevertheless, the country’s interbank rate – known as the Rigibor – continues to soar on nearly a daily basis. As it stood earlier on Monday (H/T Jonathan Tepper at Variant):
Meanwhile, Edward Hugh over at A Fistful of Euros blog provides this telling historical chart of the Rigibor rate, to give you some point of reference:
Of course defending your currency can prove a costly exercise. Bloomberg reports Latvia has spent some $1.26 bn buying lati from the market to support its euro peg this year, the latest defence coming in at its most expensive yet costing some $331m.
So, while the lat may be up on Monday, analysts question just how long the Latvian central bank can keep up such intervention. Bloomberg also reported Latvia’s total foreign currency reserves stood at some €2.8bn in May.
Accordingly, jitters over an imminent devaluation remain firmly ensconced within the market.
Adding further pressure too are local Swedish reports from the weekend — as yet unconfirmed — suggesting local foreign-exchange firms were already declining lati for exchange.
But as Barclays points out on Monday there is some possible salvation in the fact that the local deposit base has remained relatively resilient, so far at least (our emphasis):
Latvia’s banking system is at the heart of the issue because: 1) it is crucial for the stability of the currency peg itself (ie, a deposit run could force the peg to break, and 2) it would have to absorb the immediate balance sheet impact a devaluation would create.
Thus far, lending has collapsed and nonperforming loans are soaring, but the local deposit base has remained relatively resilient. Currency substitution continued, but deposits were not withdrawn, seemingly reflecting locals’ confidence in the system. Indeed, given the relatively small absolute amount of financing required relative to the size of the potential help offered by the EU, the IMF, Sweden and other multilateral and bilateral organisations seems to make the temporary bridging of funding gaps manageable (ie, keeping official reserves at comfortable levels).
This greatly reduces the threat of a “forced” (ie, disorderly) abandonment of the peg, in our view. By the same token, however, without official lender support, the peg may not withstand the pressures, even in the short term (Figure 4).
Make no mistake, the ‘Baltic Three’ are in the dock – FT Alphaville
Urgent message from the central bank of Latvia: ‘Do not disrespect us!‘ – FT Alphaville
Latvian bond failure begins – FT Alphaville
A Baltic quagmire, continued – FT Alphaville