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Tuesday, July 21, 2009

Danskebank's EMEA Daily Latvian Quote Of The Day

Quote of the day: "Representatives sitting in Washington and educated at Yale do not fully understand what is going on in Latvia", Latvian Economics Minister Kampars yesterday on the Latvian TV programme 900 sekundes.

As they point out, when the borrowers publicly criticise the lenders in this way, something must be going on.

While Mr. Kampars might be right on his assessment of the IMF staff, it is certainly unhelpful for further negotiations (if there are to be any) to bad mouth the institution that is supposed to give Latvia a loan. In our view it increasingly looks like the IMF will not pay out the next instalment on Latvia’s loan. This not only has ramifications for Latvia, but should also be a reminder to investors that the IMF is not just a “money machine” that automatically bails out all countries with funding needs.

Also Danskebank provide some simple calculations to illustrate the extent to which Latvia does still need the IMF funds:

A back of the envelope calculation illustrates this. In June, central government spent about EUR 125m more than came in revenues and funding. Assuming that this “burn rate” continues for the rest of the year (August-December) then that adds up to EUR 625m for the rest of the year. Furthermore, during the rest of the year EUR 715m worth of t-bills are maturing which need to be rolled over. Hence, the refinancing of maturing debt and the monthly cash burn adds up to EUR 1,340m. In our assessment the Latvian state treasury probably has EUR 540m in liquidity at the moment. That leaves the Latvian central government with a funding need of EUR 799m. This is why it is important that the EC in the Supplemental MoU ties up half of the EUR 1.2bn instalment for the financial sector, as the amount that will be “free” to cover the budget deficit will be less than the funding need (EUR 600m vs EUR 799m).

Thus, according to Danske the Latvian government will be around 200 million euros short by the end of the year – unless it is able to roll over more than half of the maturing debt, something which would require sustained perfect conditions for issuance in the local money markets for the rest of the year, unlikely given that the international markets are more or less closed to Latvian debt, and that non receipt of the IMF share would hardly increase the risk appetite.

Parex Update

The situation at Parex bank seems to be giving rise to all sorts of speculation at the moment. It has been suggested that the Banks owners have been systematically taking advantage of the bailout to line their own pockets. Some support for this view can be found in the statement of the Latvian Finance Ministry last Friday that it had asked the state prosecutor's office to probe Parex takeover last year.

RIGA, July 17 (Reuters) - Latvia's Finance Ministry said on Friday it had asked the state prosecutor's office to probe the state takeover last year of a major bank that helped trigger the need for the country's IMF-led bailout.

The IMF has delayed its latest share of lending in the bailout, though the EU has decided to give a further 1.2 billion euros. The prime minister said he would hold more talks next week with the International Monetary Fund (IMF). Some local media reports and politicians have criticised the wisdom of taking over the country's second largest bank, Parex, and the way it was done. Most recently the media has reported that some former employees left with big handouts. Finance Minister Einars Repse said he had asked the prosecutor's office to investigate the takeover to clear up such controversies

What the connection is (if any) between the "Parex affair" and all the other unknowns we have in our equation set at the moment still remains to be seen.

And finally, to close, here's yet another Latvia quote, this time from former IMF chief economist Ken Rogoff:

“It is so clear that Latvia’s peg is ultimately unsustainable, all protestations by Latvian government officials notwithstanding,” said Kenneth Rogoff, a former chief economist at the I.M.F.. “But ultimately unsustainable pegs can go on for years before crashing and burning, and Brussels seems to be willing to pay a lot to get past the financial crisis before cutting the cord on Latvia.”


Zinatajs said...

To provide with logic behind quote of the economics minister, I believe he thought that the EC and IMF does not realize the scope and importance of grey economy in the country. With that figure hard to estimate (ranging from 15%-40%). Any increase of Tax base will only push the economy on the gray side both for individuals (tax exemption on income earned) and for companies (unaccounted cash revenue, forgone taxes,etc). Thus resulting in even less tax revenue that initially had and larger budget deficit to balance.
As for VAT tax, as a sign of protest, some of the local companies have publically annouced the full closure of their business if the VAT is raised to 23%.

Robert said...

I thought to get your views on something else.

I think it is not a secret that lots of Latvians have emigrated from Latvia in search of jobs. In pre-crisis time I remember reading a number of articles that there is a considerable economic impact of this. Latvians earn considerably more abroad than in Latvia and actually spend their income back at home.

I was wondering if the current Latvian Bank's stubbornness to maintain the currency peg actually has a considerable hindering effect on the repatriate expenditure. That could be especially true for Latvians earning their salary in GBP.

Edward Hugh said...

Hi Robert,

"I was wondering if the current Latvian Bank's stubbornness to maintain the currency peg actually has a considerable hindering effect on the repatriate expenditure. That could be especially true for Latvians earning their salary in GBP."

Well, it's an interesting question. I hadn't thought about this. In the end the family is just like any other corporate entity, there is an income account and a capital account. When resources are needed under the income account then transfers will be made, whatever the rate/price. But if they are for the capital account (saving, asset accumulation), then they will be stored till after devaluation (or deposited in euros in the Latvian bank). So at the end of the day the issue is the same: Lat liquidity.

Robert said...

As far as I know the prevailing assumption is that usually repatriates earn more than they need for bills and living expenses of their family members back at home.

Interesting question is how did and if their behaviour change. They can either save that money in Latvian or leave it in their British/Irish bank (which any employee has to have). Knowing an overall sentiment about Latvian economy and convenience of not transferring money, I would think they do the latter.

Another interesting aspect I observed is that if before some family members migrated and some stayed in Latvia, then now the whole families are emigrating to countries like Britain. Especially if one is earning their income in GBP maintaining the family in Latvia is becoming quite an expensive exercise.

I may be wrong, but I have a suspicion that the cost of maintaining the currency peg at current level could cost more than Latvian government imagines. For me it is another step towards the stagnation of economy - if Latvian families are minimising spend and investments in Latvia. Not to mention devastating demographic effect.

Edward Hugh said...


I think your argument is pretty sound, and actually quite important.

Anonymous said...

Yes, very interesting, another warning I have for you. I work for the project Olympic Games in Sochi. Now there are these "aliens" inhabitant of Latvia or Estonia with passports on the building sites in Sochi. So in other words, there is manpower from the Baltic States ready are to worke for 1,000 to 1,300 roubles on the day. This was not some months ago. Very good for the project but tells a lot about the baltics