Latvia’s Off-Key Chorus Call
Latvia, which has been hailed as a IMF-European post-crisis success as it stoically bore punishing austerity moves, saw popular anger pour into the streets as the previous coalition government attempted to reassemble despite the runaway victory of the pro-Russia anti-fiscal consolidation Harmony Center party currently controlling the capital Riga. Legislators deserted the old grouping over its desire to block participation, as the government also faced a backlash from disgruntled foreign investors, including well-known Baltic funds East and Firebird, for preventing voting and compensation at nationalized Parex Bank. The EBRD became a key shareholder after its collapse and issued a grim GDP growth revision for the area with the rolling Eurocrisis halving next year’s forecast to 1.7 percent. The institution, after marking its 20th anniversary, enlarged geographic reach to include North Africa in response to Arab Spring assistance demands, but warned of deterioration among core members that could slow diversification. Turkey was added as a qualified recipient last year as the current account deficit covered predominantly by portfolio inflows will be 10 percent of GDP, according to officials. In 2012 to bridge the gap, as well as private sector debt owed, $200 billion may be needed as the lira continues to plunge toward 2/dollar despite central bank intervention. With foreign exchange reserves just over $80 billion a defense cannot be mounted indefinitely and the IMF has urged monetary tightening to ensure allocation in a reversal of the current stance. International holding of local bonds is over 15 percent, and to staunch the fiscal deficit authorities have just introduced new alcohol and cigarette taxes as they execute a medium-term strategy to pare public debt. Banks, as main listings on the stock exchange, have been big losers with hefty government bond and consumer lending portfolios regulators have tried to curb. A tougher environment has caused parents in core and peripheral Europe to rethink their presence, which is not bound by the Central Europe-specific Vienna Initiative agreed in the immediate post-2008 period.
EBRD observers believe a return to “graduate” Hungary is possible with the Orban administration renouncing IMF ties and foreign banks now facing arbitrary-rate forint mortgage conversion which may finally force outright withdrawal notwithstanding the Vienna pledge. Erste will take a large write-down there as GDP growth for next year has been adjusted to an anemic 1 percent while the budget deficit will rise to 3 percent. A further sovereign ratings downgrade to junk would remove a chunk of the foreign buyer base of one-third local debt outstanding. The country is the subject of EU complaints over tax, currency and constitutional changes as the regional margin for leniency vanishes.
