tag:blogger.com,1999:blog-690923004277466712.post7820742469796140263..comments2010-02-10T23:13:15.057+01:00Comments on Baltic Economy Watch: Latvia - Devalue Now or Devalue Later?Unknownnoreply@blogger.comBlogger5125tag:blogger.com,1999:blog-690923004277466712.post-71223268067010827402009-06-11T11:57:01.691+02:002009-06-11T11:57:01.691+02:00The following is a press release from Moody's ...The following is a press release from Moody's Investors Service:<br />Implications of a devaluation for the sovereign rating London<br /><br />Speculation has grown over the past few weeks about a possible devaluation of the Latvian currency. In a new SpecialComment entitled, "Living on the edge: Latvian devaluation speculation and implications for the sovereign rating", Moody's Investors Service outlines its expectation that a devaluation is likely to be avoided in the near term, and the possible impact on the sovereign rating if a devaluation becomes more likely. "Moody's believes that the net benefits of a devaluation are highly questionable; hence, the determined bid of local authorities to maintain the currency peg in spite of the painful adjustment required to do so," says Kenneth Orchard, a Vice President-Senior Analyst in Moody's Sovereign Risk Group. <br /><br />"Furthermore, there is also a financial and political commitment from the international community to support the peg through the turbulence." Indeed, Moody's notes that it would be much easier and cheaper for the EU to shore up Latvia than to try and contain a regional financial crisis, especially considering that the amount of funds needed by Latvia are relatively small. <br /><br />However, Moody's also stresses that the possibility of a devaluation cannot be ignored, as the economic and social pressure in Latvia will continue to be elevated for some time. Moreover, expectations of a currency devaluation can sometimes become self-fulfilling. Moody's has downgraded Latvia's rating by five notches over the past eight months; Latvia is currently rated Baa3 with a negative outlook. "Moody's Baa3 rating on the Latvian Government balances two bifurcated potential outcomes: a devaluation and no devaluation scenario," says Orchard. <br /><br />"Therefore our rating already incorporates a moderate risk of a devaluation, but it would likely be lowered further if the risk of a devaluation increases further."<br /><br /><br />In the Special Comment, Moody's indicates that a devaluation, if it occurred, would be consistent with a non-investment grade rating (i.e. below the current level). Although the government's liquidity would probably be supported by the international community -- so the ability to service debt is not in serious doubt -- the shock to confidence, the government budget and private sector balance sheets would be severe, and would take several years to recover from. Alternatively, if the Latvian authorities are able to avoid devaluation, stabilise the economy and adopt in the euro in several years time, the rating could eventually rise to the 'A' category. <br /><br /><br />Moody's highlights four factors that it is monitoring to determine if another downgrade is warranted: (1) Latvia's fiscal consolidation programme; (2) interbank interest rates; (3) official foreign exchange reserves; and (4) leadership at the central bank and government. Of these, Moody's believes that factor (1) is the most important, as the other factors will likely be influenced by the progress on fiscal consolidation.Kennethnoreply@blogger.comtag:blogger.com,1999:blog-690923004277466712.post-1429495774364359362009-06-09T19:12:57.642+02:002009-06-09T19:12:57.642+02:00Also,
In Luxembourg, Latvian Finance Minister Ein...Also,<br /><br /><i>In Luxembourg, Latvian Finance Minister Einars Repse sought to erase any doubts about the viability of the budget cut plan which was agreed by the government, coalition parties, president and central bank chief on Monday. "We will be cutting no less than 10 percent of our GDP over three years but this will bring our imbalances down and pave a very solid basis for recovery," he told Reuters.</i><br /><br />This is this, in another form:<br /><br /><i>In emerging market countries with debt overhangs, the “Keynesian” effect of fiscal adjustment is likely to be outweighed by “non-Keynesian” effects related to expectations and credibility. Non- Keynesian effects have to do with the offsetting response of private saving to policy-related changes in public saving. In particular, if fiscal adjustment credibly signals improved public sector solvency, a fiscal contraction could turn out to be expansionary, as private consumption rises based on the view that future tax hikes will be smaller than previously envisaged.</i> <br /><br />ie this is the "great experiment" you are being asked to perform, while everywhere else fiscal deficits are seen as the way to cushion the downturn.<br /><br />My view: this won't work.Edward Hughhttps://www.blogger.com/profile/10384039867580949531noreply@blogger.comtag:blogger.com,1999:blog-690923004277466712.post-91697813653904238172009-06-08T23:30:53.658+02:002009-06-08T23:30:53.658+02:00Hello Stefan,
"If there is any "correct...Hello Stefan,<br /><br />"If there is any "correct" peg, then it should be where the balanced current account is..."<br /><br />Well, there is only small details here, the current account is balanced at present with the economy contracting at a velocity of 18 percent per annum.Edward Hughhttps://www.blogger.com/profile/10384039867580949531noreply@blogger.comtag:blogger.com,1999:blog-690923004277466712.post-67679459218358361362009-06-08T23:16:06.097+02:002009-06-08T23:16:06.097+02:00Why should a country with a balanced current accou...Why should a country with a balanced current account be advised to devalue...<br /><br />If there is any "correct" peg, then it should be where the balanced current account is...<br /><br />The case for a devaluation was for various reasons weak also before, but today it seems non-existing.<br /><br />The case might have been another if market-forces would have access to specualtive tools big enough to challenge the peg. In my understanding, that is not the case.stefannoreply@blogger.comtag:blogger.com,1999:blog-690923004277466712.post-56711972568252531992009-06-08T12:32:31.548+02:002009-06-08T12:32:31.548+02:00"There is certainly no possibility for euro-e..."There is certainly no possibility for euro-exit strategy for the US as they are in big trouble with most of the Maastricht criterias."<br /><br />Yep, but I think this misses the central point, which is the absurdity of the Maastricht criteria in the present situation.<br /><br />If the East Europe EU members - instead of squabbling with one another about who is better and who is worse - could come together in a common front, my feeling is that they could get these terms changed.<br /><br />I mean, Germany is going over 60%, Italy is over 100%, and Greece is nearly there, etc etc. One set of values are being applied to those who are out, and another to those who are in.<br /><br />And don't get me wrong, I am in favour of reducing debt to GDP, I've been arguing about this for years.<br /><br />We need serious long term structural reforms, but we also need to get through the present crisis.<br /><br />Basically, the IMF can do the math as well as I can. They must know that on some possible scenarious there is no euro membership for Latvia in the time horizon being suggested under current Maastricht conditions.<br /><br />So the exit strategy falls, and the whole thing no longer makes sense.<br /><br />Perhaps that is why there is the long silence.<br /><br />If they do decide to continue with support on the current basis it will only be as a stopgap measure, to await "more favourable circumstances" for the changeover, but unfortunately these more favourable circumstances may be too long in coming.Edward Hughhttps://www.blogger.com/profile/10384039867580949531noreply@blogger.com