Krguman on me:
"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."
Krugman on himself:
"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.)"
The Latvian Financial and Capital Markets Commission yesterday with numbers on domestic loans currently in arrears.
By the end of Q1 2009, loans in arrears in Latvia amounted to 20.5% of the aggregate loan portfolio of Latvian banks (up 5.5 percentage points from the end of 2008). The aggregate loan portfolio of the Latvian banks was worth LVL 16.4bn (approx. EUR 23bn) at the end of March 2009. Of the bank loans issued to households in Latvia, 22.1% were in arrears at the end of March 2009. Furthermore no less than 21% of mortgage loans were in arrears by March.
Danskebank on the Commission report:
We are quite concerned about the speed at which the non-performing loans are rising. Considering the gloomy outlook for the rest of 2009 NPLs are probably set to increase even more. We highlight that there is not a 1:1 relationship between NPLs and loan losses, but nevertheless these data cause us to believe that bank loan losses will go much higher than current levels – particularly in Latvia but also in the other countries.
And finally Krugman, who can speak for both of us here:
"This looks like events repeating themselves, the first time as tragedy, the second time as another tragedy."
Amen to that!
3 comments:
What is the percentage of euro denominated loans in Latvia? Is there differences between social groups in the likelihood of having euro denominated loan versus lati denominated debt, i.e. who would lose and who would win? Political establisment seems to think that devaluation would be a bad thing for them.
I guess it is likely that Latvia is forced to devalue in the end. The story of Finland in 1991 should be a good place to start learning.
Hi,
"What is the percentage of euro denominated loans in Latvia?"
Very, very high. (From memory) over 90%, I think.
"Is there differences between social groups in the likelihood of having euro denominated loan versus lati denominated debt,"
Basically I think lati mortgages are negligible (similar position across the Baltics), but the social distinction would be between those who have debt and those who don't. Obviously all those who had significant debts were very very nervous about devaluation at the start. As time goes on what we could call the "throwing the towel in" rate is evidently going up. So yes, we should expect to see changes in attitudes.
The thing is, the IMF were only talking about a 15% devaluation possibility initially. Now we have an 18% contraction in activity, and lots more to come. Plus interest rates have come down a lot.
Do the sums. A "managed" devaluation would not have been anything like as bad in comparison as the scaremongers were saying. The pity was too many people didn't understand enough basic economics, and many of those who didn't understand the basic economics were taking policy decisions in Latvia, including over at the central bank.
Having said that, devaluation or no devaluation, things were always going to be hard for the Baltics after the boom-bust. And then there is the underlying demography to think about. So I am certainly not trying to hold out any simple "quick fix" panacea.
I would concur with Edward, that the percentage was quite high. Generally, the banks refused to lend in the local currency as a matter of policy.
Since 2000, I have never been offered any local currency loans for personal mortgages/leasing (4 bank offers).
For business loans i have received one short-term loan and one car leasing in local currency though i was forced to covert the loan to EUR last year. Otherwise, i have taken 4 other loans (real estate mainly) where all offers were only in EUR and typically i would get 2-3 offers in each case.
Post a Comment