Latvia's government announced today that it has decided to take over the nation's second most important financial institution after the bank ran into liquidity difficulties. The Latvian government apparently decided late yesterday (Saturday) to take a 51 percent stake in Parex Bank, Latvia's second largest bank by total assets, following the preparation of data that indicated the bank was headed toward insolvency.
Prime Minister Ivars Godmanis stated that Parex was functional but in need of liquidity. He also said the government had faced a choice of either taking control of the bank or allowing it to enter bankruptcy. The government also suggested that there were no plans to rescue any of Latvia's other 25 banks at the moment, but that the possibility could not be excluded in the future.
The government bought the majority stake in Parex for 2 lats ($3.70). Another 34 percent stake in the bank will be held as collateral by the state-owned Hipoteku Bank. Obviously the fact that they have had to nationalize Parex bank was yet was another blow to Latvia's deteriorating economy, and to the governments present strategy for addressing the crisis. On Friday we learnt that gross domestic had fallen by an annual 4.2 percent in the third quarter.
Parex Bank was almost unique in both the Latvia and Baltic context in that it was homegrown. Founders Valery Kargin and Viktor Krasovitsky established the bank in 1992, one year after Latvia split from the Soviet Union and achieved independence.
A majority of the banking industry in the Baltic states of Estonia, Latvia and Lithuania are owned by Scandinavian financial institutions, and hence, up to now, have been somewhat shielded from the downturn.
This is obviously the first, and not the last, piece of news of this kind we are going to get during the present economic slump, and the nationalisation decision is sure to heat up the debate about whether or not to seek IMF protection, and indeed whether (or when) to break the Lat-Euro peg.
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Sunday, November 9, 2008
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Estonia At A Glance January 2008
Welcome to the Baltic Economy Watch Blog. Below you will find the normal chronological blog posts. But first we would like to present some charts which provide background data and which we hope will help the first time reader better assess and get to grips with the argument being presented here. The only really big question about the EU10 economies as we enter 2008 is - among the more vulnerable ones (the Baltics, Bulgaria, Romania, and Hungary) - who will be the first to go over the edge of the chasm which seems to lie out in front. Basically we have two sets of curves to look at. One set go up, and these essentially refer to prices and wages. The other set go down, and they refer to levels of domestic economic activity and consumer and producer confidence. We hope you will find the background data presented here useful in assessing the argument which we are presenting on this blog, which is basically that a key component in the emerging economic crisis which is arriving in Russia and much of Eastern Europe has its roots in the underlying demographics. Basically after years of low fertility, and in many cases out migration, there is just not the labour supply available to fuel rapid catch up growth without provoking strong inflationary pressures. We feel the evidence here is just to strong and to widespread to ignore. In the long run fertility does matter. Please click on thumbnails for better viewing.
GDP growth, which was of course strong, is now slowing, and unemployment, which has been trending steadily downwards, should really start to increase at some point. This will mean, basically, that the days when Estonia urgently needed to import migrant workers to try and avoid the huge spike in wages and prices which we have seen is now largely passed.
Private domestic consumption has almost certainly peaked, and is now in rapid decline. This is evident from the reatail sales data, and from the reducing number of notarial property contracts, which are a reasonable indication of the state of the housing market. So what happens next?
When I say that the time for fomenting rapid inward migration is now past this does not mean that in terms of longer term stability Estonia does not need to focus on raising fertility and attracting new citizens from elsewhere to compensate for those who have simply not been born: What I am getting at is that all of these issues will now take rather a back seat as the short term dynamics increasingly take over.
Unfortuantely opportunities have been lost, but there is no point in going back over old arguments. One measure of the very difficult situation Estonia will now in all probability find itself in is that the policy priority will now need to switch from attracting migrants to retaining the young workers it already has and avoiding an uptick in out migration.
The extent to which this will prove possible will depend on the level of distress which Estonia's citizen are faced with at the end of the day, and this depends on exactly how hard the hard landing turns out to be.
2008 Forecasts:Forcasts as such really go out of the window at this point, since pretty soon none of them will be worth the paper - or spreadsheet - they have been written on.
Once we see the measure of the problem we will be able to start to think about policy measures to help move forward. This is not the end of the world, but it is going to be a bumby ride and serious structural damage will be done. So all I can say is, fasten your seatbelts.
This blog will not have daily update posts on Estonia or the other Baltic countries (where the situation is not that different), until or unless events start to move at a pace which makes these desireable. There will be data updates from time to time, and extensive monthly reports, the next of which (for Estonia) will be at the start of February.
I also recommend my two recent extenisive summary posts from Claus Vistesen:
Catch Up Growth and Demographics - Evidence from Eastern Europe
Translation Risk in the Baltics and other matters on Eastern Europe
3 comments:
Edward,
I hope that lat can resist the pressure. I heard that the Latvian Central bank has been intervening for some time (longer than last time when there was pressure on lat).
How do you see the other Baltic currencies in this situation? I so hope that the currencies could survive intact to enter euro. How do you see this? Is it only wishfull thinking?
Let´s see what will be the next bank.
For Latvians I do hope that LVL will resist, but to be honest I must say LVL is much too overvalued currency.
Hello both of you.
I appreciate the reasons why you are concerned, but I have to agree with the second comment. After all that inflation Latvian prices are now way too high to be able to get strong GDP growth out of exports, and domestic demand is just about dead as a driver as far ahead as the eye can see, so at some point de-pegging becomes inevitable, if you don't want complete meltdown.
Your economy can be like the proverbial bathwater circling down the wastepipe as the young people leave in search of work elsewhere as the other European economies start to pick up starting in 2010 I'm afraid. Whichever way you look at it the year ahead is going to be hard, on my view better to use it doing something constructive rather than simply sitting there waiting to have your head chopped off.
By the time we get round to 2012 the whole CEE landscape is going to look very, very different.
"How do you see this? Is it only wishfull thinking?"
I'm afraid I think it is. If the Euro is still there in its present form (we need to worry about sovereign debt and external imbalances in Southern Europe too) by the time Latvia is ready to join, then better to get the parity right so you can export to the other eurozone countries.
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