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Monday, July 20, 2009

Brief Latvia EU Loan Update

Well, there is still effectively no word from the IMF. But The EC did today release an addendum to its memorandum of understanding with Latvia identifying a number of economic and fiscal policy measures it wants the country to enact before it receives next chunk of funding. The document, which is a pretty rough-and-ready PDF photocopy, can be found here. Reading the document, one thing seems certain: the upcoming tranche of 1.2 billion euros will not now be sufficient to cover the budget deficit for 2009, since the EC requires half of the money to be set aside for the financial sector - which prompts the question, is the nationalized Parex bank really as healthy as the government and the bank's leadership have previously said it was?

Other items of interest in the document are the proposal to raise VAT in 2010 from 21% to 23% if other forms of revenue raising cannot be identified. The impact on already very hard pressed retail sales is not too hard to imagine. The introduction of a residential real estate tax is also proposed with local authorities being empowered to increase the real estate tax to 3% of cadastral values. If implemented, this will do only one thing: further reduce Latvian real estate values which are already down 50% from their peak, and on whose bottoming-out any hope of ultimate recovery depends.

Which is another way of saying that in macro economic terms the document leaves rather a lot to be desired, and essentially it is hard to find any item which is actually going to stimulate rather than flatten a recovery.

Also worthy of note is the requirement that Latvia now has to closely coordinate policy with the EU and the IMF.

"All significant Cabinet decisions or other decisions with a fiscal impact, including on social security or any guarantee scheme, shall be announced and undertaken only after discussions with the EC and the IMF,"

The document also stipulates that the government will have to report every month on all key aspects of spending and revenue, including providing a breakdown for each ministry as well as for local governments. These performance criteria, given the now near total dependence of the country on external support - de facto, as a sovereign state Latvia has effectively ceased (at least temporarily) to exist, some 19 years or so after its foundation - are not surprising in and of themselves, but it could have been hope that the country would have been better served in terms of the kind of advice which is being offered. The document repeated that Latvia should aim to reach a budget deficit of 10 percent of gross domestic product (GDP) this year, 8.5 percent in 2010, 6 percent in 2011 and 3 percent in 2012, numbers which, if my back of the envelope calculations are not totally awry mean that Latvia's debt to GDP will be outside the EU 60% limit by the time the deficit comes down under 3%, depending on GDP performance in 2010 and 2011. In any event it will be touch and go. So you enter by one door, only to leave by the other.


Nutt ja Hala said...

so when will Latvia devalue?

Edward Hugh said...

Hello Nutt,

"so when will Latvia devalue?"

Absolutely no idea. Most probably not soon, within a year quite probable.

Edward Hugh said...

"And after this short introduction, (based on AEP's writings about CEE) Edward, what is your opinion about Ambrose Evans-Pritchard? "

Ideally, no comment. Evans-Pritchard (whose grandfather, the anthropologist, I greatly admired) is essentially a politically inspired "wing nut", spreading Daily Telegraph style "paranoia". I am a non-political pragmatist, whose only allegiance is to the "hard centre".

His opposition to the Euro is political rather than economic, my reservations are all economic rather than political.

Evans Pritchard shares a lot of the UK anti-Europe phobia, with the unusual twist that since he appears to regard the United Kindom as some kind of new socialist experiment, he is also anti UK (or put it this way, very pessimistic and scaremongery, the thing is going to the dogs, ever since I was born the UK has been "going to the dogs" for these people).

So what you get is a kind of pchyzo-paranoia where you go from one catharsis to the next, and there is little in the way of good news. I am pretty optimistic on Turkey, India and Brazil, or hadn't you noticed?

In other words, while my stock in trade is analyisis (which may be right or wrong, and is subject to empirical testing) Evans Pritchard works on emotions. Primal ones. Still, as I once said, even a stopped clock is right twice a day.

Anonymous said...

I hear today some rumors regarding Russia: as You know Mr Putin ordered increse of pensions from next year; but what he did'nt say was that rouble will be devalued again somewhere around the same time.
Just a rumor.