Latvia’s Fading Fiscal Fatigue Remedy
Latvia prepared to sell $2 billion in Eurobonds as it entered the final stretch of the 2008 EUR 7.5 billion IMF/EU program as Fitch restored an investment-grade rating, although Finance Minister Vilks admitted to budget “consolidation fatigue” as he sought additional ways to meet this year’s agreed 5 percent of GDP deficit target. Standard & Poor’s lifted the sovereign outlook to positive in March on “rapid rebalancing” with the once double-digit current account chasm on track for a modest 2011 surplus. Government debt is under 50 percent of output with the refinancing rate steady at 3.5 percent, which was also the GDP growth rate registered in Q4 2010. Inflation is slightly above that figure, as higher taxes were part of the “internal devaluation” strategy designed to safeguard the currency peg. The Prime Minister has insisted that euro entry will come by 2014 when the maximum 3 percent of GDP fiscal shortfall can be upheld as well as any further Maastricht criteria revisions that should be strictly “rule-based” to limit discretion. Along with this issue he has been asked to resolve a dispute with minority shareholders in Parex Bank, whose failure triggered the crisis and then was split in half to isolate bad assets. Big foreign investment funds East Capital and Firebird claim they suffered dilution and were shut out of recapitalization decisions, and that the country may have violated bilateral protection treaties.
In Estonia, where shares have rallied since euro entry, the Reform party-led coalition won re-election with over half of parliamentary seats as quarterly economic growth exceeded 6.5 percent and unemployment dipped below 15 percent at end-2010. The former rate topped the EU’s emerging market members, with strong electronics exports but also new real estate construction despite a deep inventory overhang. External corporate and household debt fell 15 percent to 25 percent of GDP, although food-driven inflation is near 6 percent. Scandinavia is the largest trade destination, a relationship that has also benefited adjacent Lithuania as GDP growth heads toward 3 percent. Nordic banks that dominate locally have cut their losses as the sector continues with EU authorization to receive state aid. Joblessness however approaches 20 percent, and the parties in power took a drubbing in recent municipal elections. The Economy Minister was also forced to resign on conflict of interest charges in another common syndrome that has tired policymakers and voters.
