I’ve been saying this for a couple of weeks, but Edward Hugh has the goods.
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. 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.)
This looks like events repeating themselves, the first time as tragedy, the second time as another tragedy.
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Wednesday, December 24, 2008
Travelling Through Latvia In Good Company
Well, it seems I'm not the only one who thinks that the IMF have made a bad decision here, this year's economics Nobel Prize winner Paul Krugman seems to agree. From his New York Times blog:
Posted by Edward Hugh at 10:44 AM