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Tuesday, February 24, 2009

Fitch Worried By The Impact Of Political Turmoil On The IMF Loan

Fitch Ratings warned this morning that the collapse of Latvia’s government at the end of last week materially increases risks to the IMF-lead bailout plan since the agreed budget cuts may now be delayed.

“Fitch believed that a failure to maintain budget controls could delay the disbursement of international funds to Latvia, and lead to renewed pressure on Latvia’s currency,”.

The government collapse comes at a very delicate time, since an IMF mission is currently visiting, and growth (or should I say contraction) forecasts now suugest the contraction will be deeper than anticipated which will evidently mean further budget cuts. Latvia’s Finance and Economy ministries now estimate that the economy will contract 12 percent this year, revised from an earlier projection for a 5 percent reduction in gross domestic product. Latvia agreed to keep its budget deficit at 5 percent of GDP as part of its 7.5 billion euro bailout deal.

“A protracted delay in forming a new government or new elections could, however, delay the implementation of austerity measures and make it harder to keep the budget in line with objectives,” Fitch said in the statement. “This, in turn, could affect the disbursement of loans from the IMF and others.”

Fitch currently rates Latvian debt at BBB-, one level above junk, and “believes a failure of the IMF program would increase pressure on the domestic banking system and the currency peg, putting negative pressure on the country’s rating.”

“The extent of the recession and economic pain from the austerity measures being felt by the country increase the risk of a popular backlash and could thwart the sustained implementation of the IMF program,” Fitch said.


A said...

I do not believe the decrease of GDP will be "only" 12%.
15% I bet.

Robert said...

You are probably right. State officials often underestimate the negative.
The big question is how will the new gouverment deal with IMF etc.
I would guess there is big risk/chance that the new gouverment will scrap IMF and devaluate.
/Robert C

Latvian abroad said...

The new government might look like the old government. People's Party leaving the government so that they can come back to the same coalition but have their own prime minister instead of Godmanis.

Too bad they keep playing those games at the time of crisis. But the policies might not change that much.

Philippe said...

dombrovskis showed in his work at the EC that he is defending the farmers of Latvia and neighbours but that he can oppose environmental policies when they may be detrimental to some Latvian companies' interests. Was he defending Latvia's firms as a whole or just lobbying? He shows himself as a SME defender. Will he keep on defending them when in power? His job will be difficult and certainly unpopular and his party showed in the past that it can be on the verge of populism (though most other parties of ours are definitely populist).
Nevertheless, New Era was the best governance we ever had here. So IMHO, we are now much closer to a real commitment to sound economical policies than we were with the previous team. And Dombrovskis and Repse have a much cleaner record in that field than any other - especially the russian-sect-remote-controlled-energy-drink-would-be-Riga-mayor who's been driving Latvian politics for the last 5 years.

Robert said...

The best for Lativan economy and its people would in my mind be that they start consuming more products that are produced in Latvia.
Hence a devaluation of the currency would be of benifit for the farmers making there product more price attractive compared to the Lithuaninan food now much cheaper that Latvian.