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Tuesday, May 12, 2009

Non-performing Loans In Latvia

This is all so tragic, and so foreseeable (viz, my original post here, for example).

Krguman on me:

"Hugh puts his finger, in particular, on one gaping hole in the logic of the opponents of devaluation. We can’t devalue, they say, because the Latvian private sector has a lot of debts in euros, and a devaluation would make it very hard for borrowers to service those debts. As Hugh points out, the proposed alternative — sharp wage cuts, and basically a major domestic deflation — will also make it hard to service those debts."

Krugman on himself:

"In fact, I’d be a bit more specific than Hugh: other things equal, a nominal devaluation and a real depreciation achieved through deflation should have exactly the same effect on debt service (unless some of the debt is in lats rather than euros, in which case devaluation would do less damage.)"

The Latvian Financial and Capital Markets Commission yesterday with numbers on domestic loans currently in arrears.

By the end of Q1 2009, loans in arrears in Latvia amounted to 20.5% of the aggregate loan portfolio of Latvian banks (up 5.5 percentage points from the end of 2008). The aggregate loan portfolio of the Latvian banks was worth LVL 16.4bn (approx. EUR 23bn) at the end of March 2009. Of the bank loans issued to households in Latvia, 22.1% were in arrears at the end of March 2009. Furthermore no less than 21% of mortgage loans were in arrears by March.

Danskebank on the Commission report:

We are quite concerned about the speed at which the non-performing loans are rising. Considering the gloomy outlook for the rest of 2009 NPLs are probably set to increase even more. We highlight that there is not a 1:1 relationship between NPLs and loan losses, but nevertheless these data cause us to believe that bank loan losses will go much higher than current levels – particularly in Latvia but also in the other countries.

And finally Krugman, who can speak for both of us here:

"This looks like events repeating themselves, the first time as tragedy, the second time as another tragedy."

Amen to that!


Robert said...

It is just too sad that the government of Latvia is not as thoughtful if the problem facing Latvia.
We are seeing a depression in Lativa and also the other baltic stats.
Is it only the government that do not see what is happening to the very nice country of Latvia.

obama said...

If we will start to mess with devaluation following will happen:

1) FDI will drop drastically
2) Banks shall be nationalized
3) We shall finance our-selves for next 10 years (which we being a poor country cant do)
4) Russian strong arm will try to support us
5) We will have problems with EU, for destabilizing the region, thus fund flow will decrease
6) Due to lack of FDI we wont be able to get EU Structural funds. Please do some research on the how much money we pay in EU funds and how much money we get from EU. Results will be surprising.

So in the end of the day, these scenarios are quite obvious to EU as well (in particular one with the Russian strong arm), thus there is 0 chance that we can default or face very sever economic climate:
1) Default mean social unrest = opportunity for Russian arm
2) We already have become uber competitive (it is easy to find semi skilled labor force for 100-200 LVL/month), thus production of low value added goods will resume in no time

The problem with the most economists are that they only look from the economical perspective but forget other significant perspective of geo-politics which eventually come in play

Latvian abroad said...


what FDI are you talking about? With the collapsing economy, FDI into real estate and shopping centres will not be coming here any more, no matter what Latvia does.

But FDI into export-oriented industries(which is the one that we really need) will become more likely to come, if we devaluate.

obama said...

by FDI I dont mean shitty investments in real estate

FDI=investments in equity of Latvian enterprises (including banks) (http://www.lursoft.lv/stat/ur_stat_005.html - list of investments above 1 M LVL)

to get EU fund money for project development (read FREE MONEY FOR UNDERDEVELOPED MEMBERS) you need some other money beforehand (e.g. to develop new factory line) then when project is finished only then you can get back money from EU. But now banking sector with their existing portfolios has shit all over the pants, thus barely finance projects, and only way to finance them is via FDI. No FDI no EU money, no development.

And now if the bright ones would devaluate our currency, and already struggling enterprises (including banks) would bear currency loss, for existing investors (that are more than several) that would mean red stop sign in the European map on Latvia. Consequentially financing would stop (and as I mentioned we are too poor to finance ourselves) thus we would not get FREE EU MONEY FOR ITS POOR MEMBER STATES.

So in my view as being poorer country, our goal is to be parasite on other EU states, which we are successfully doing, and those who scream that we need to devaluate to become competitive and grow by our own means, just do not get, that, for example, if we would not have credit boom since 2004, then now we would be living 2x worse than even now


Edward Hugh said...

"So in my view as being poorer country, our goal is to be parasite on other EU states, which we are successfully doing, and those who scream that we need to devaluate to become competitive and grow by our own means, just do not get, that, for example, if we would not have credit boom since 2004, then now we would be living 2x worse than even now"

I think he is being ironic LA. You know, that Latvian sense of humour :)

Obama said...

have you asked yourself question what is the difference between, for example, the slavery and the democracy?

There is no such major difference afterall as both regime types are making difference between classes, only one way is much more violent than other (and maximizes utility for one class instead of overall utility maximization). But in the end of the day one part of the society parasites on the other - in slavery richer part are parasating on poorer, but in contrast in democracy poor society part parasites on the richer ones.

so being sarcastic parasite is not so bad overall?

Imagine new international trade theory based on the democracy fund flows and geo politics, that are the very far away from the theories of the efficiencies, maximum utilities, as well as quite common logical sense :)

so what is happening with our banana republic might not be so tragic overall?

D-boy said...

After a recent survey, 73% of people reported a pay cut already.
29% by 40-50%
13% had 30% cut
20% had 20% cut

Of course, the demographics still look very, very bad. No educational reform in sight. Much criminality and corruption in view (vz: appointment of ex-PM to board of large state-run company for outrageous salary, former mister spending ad infinitum to become Riga major, despite spending restrictions from KNAB, anti-corruption agency, and KNAB still without proper head after last head sacked by previous government).

Little magical "added value" production in sight. Cross your fingers for Latvia! Still a nice place. Perhaps you should visit :-)

Robert said...


You are totally right.

Robert said...

I just read that state revenue for the first 4 months of Latvia is 30 % lower than expected.
One can wonder how that will be recieved with the internationals lenders such as the IMF etc.