Quote of the day: "Representatives sitting in Washington and educated at Yale do not fully understand what is going on in Latvia", Latvian Economics Minister Kampars yesterday on the Latvian TV programme 900 sekundes.
As they point out, when the borrowers publicly criticise the lenders in this way, something must be going on.
While Mr. Kampars might be right on his assessment of the IMF staff, it is certainly unhelpful for further negotiations (if there are to be any) to bad mouth the institution that is supposed to give Latvia a loan. In our view it increasingly looks like the IMF will not pay out the next instalment on Latvia’s loan. This not only has ramifications for Latvia, but should also be a reminder to investors that the IMF is not just a “money machine” that automatically bails out all countries with funding needs.
Also Danskebank provide some simple calculations to illustrate the extent to which Latvia does still need the IMF funds:
A back of the envelope calculation illustrates this. In June, central government spent about EUR 125m more than came in revenues and funding. Assuming that this “burn rate” continues for the rest of the year (August-December) then that adds up to EUR 625m for the rest of the year. Furthermore, during the rest of the year EUR 715m worth of t-bills are maturing which need to be rolled over. Hence, the refinancing of maturing debt and the monthly cash burn adds up to EUR 1,340m. In our assessment the Latvian state treasury probably has EUR 540m in liquidity at the moment. That leaves the Latvian central government with a funding need of EUR 799m. This is why it is important that the EC in the Supplemental MoU ties up half of the EUR 1.2bn instalment for the financial sector, as the amount that will be “free” to cover the budget deficit will be less than the funding need (EUR 600m vs EUR 799m).
Thus, according to Danske the Latvian government will be around 200 million euros short by the end of the year – unless it is able to roll over more than half of the maturing debt, something which would require sustained perfect conditions for issuance in the local money markets for the rest of the year, unlikely given that the international markets are more or less closed to Latvian debt, and that non receipt of the IMF share would hardly increase the risk appetite.
The situation at Parex bank seems to be giving rise to all sorts of speculation at the moment. It has been suggested that the Banks owners have been systematically taking advantage of the bailout to line their own pockets. Some support for this view can be found in the statement of the Latvian Finance Ministry last Friday that it had asked the state prosecutor's office to probe Parex takeover last year.
RIGA, July 17 (Reuters) - Latvia's Finance Ministry said on Friday it had asked the state prosecutor's office to probe the state takeover last year of a major bank that helped trigger the need for the country's IMF-led bailout.
The IMF has delayed its latest share of lending in the bailout, though the EU has decided to give a further 1.2 billion euros. The prime minister said he would hold more talks next week with the International Monetary Fund (IMF). Some local media reports and politicians have criticised the wisdom of taking over the country's second largest bank, Parex, and the way it was done. Most recently the media has reported that some former employees left with big handouts. Finance Minister Einars Repse said he had asked the prosecutor's office to investigate the takeover to clear up such controversies
What the connection is (if any) between the "Parex affair" and all the other unknowns we have in our equation set at the moment still remains to be seen.
And finally, to close, here's yet another Latvia quote, this time from former IMF chief economist Ken Rogoff:
“It is so clear that Latvia’s peg is ultimately unsustainable, all protestations by Latvian government officials notwithstanding,” said Kenneth Rogoff, a former chief economist at the I.M.F.. “But ultimately unsustainable pegs can go on for years before crashing and burning, and Brussels seems to be willing to pay a lot to get past the financial crisis before cutting the cord on Latvia.”