Latvia's Government Resigns

Latvia’s four-party coalition government resigned today after two of the coalition partners called for Prime Minister Ivars Godmanis to step down. President Valdis Zatlers told a news conference in Riga today that he had accepted the resignation and that talks on forming a new government would begin next week, a timing that coincides perfectly with the forthcoming visit of an International Monetary Fund mission.

“I told the parties this was the moment of truth,” Godmanis, 57, said adding that a government that has resigned may not have the authority to sign international documents. The IMF has some requests for the government and the “it’s very important for them to know our position,” he said, declining to say what the requests were.

Zatlers said on Feb. 13 that Godmanis had “lost his trust” after the government abandoned plans to cut the number of ministries. Zatlers then said on Feb. 16 that Godmanis had admitted he made a “mistake” and agreed to continue with plans to reorganize the government.

The IMF in its report on the Standby Arrangement for Latvia said the following:

Maintaining the peg also requires substantial political commitment.

If this commitment were to falter, there is a risk that the execution of the difficult but necessary policies required under the authorities’ program could also weaken. However, all political parties are strongly committed to the exchange rate peg. Thus the revised 2009 budget was passed by a 57-21 majority, despite the exceptional fiscal tightening measures it contained. Maintaining this commitment through an anticipated prolonged recession could be challenging.

and
The authorities’ unequivocal commitment to the exchange rate peg has determined their choice of program strategy.

Though this commitment augurs well for program ownership, the authorities also recognize that their choice brings difficult consequences, including the need for fiscal tightening and the possibility that recession could be protracted, perhaps more so than if an alternative strategy had been adopted.

Of course this program ownership disappeared almost as quickly as the ink dried on the paper they all signed. Basically the problem of maintaining political will during what was always bound to be a very harsh economic correction lay at the heart of my critique of the decision to attempt to maintain the peg. See my:

Why Latvia Needs To Devalue Soon - A Reply To Christoph Rosenberg

and

The Long And Difficult Road To Wage Cuts As An Alternative To Devaluation

and Manuel Alvarez Rivera (Election Resources On The Internet) writes:

I wrote at the beginning of this month that "Governments in Latvia are usually short-lived - since regaining independence in 1991, the Baltic republic has had more than a dozen cabinets - in no small measure because of its constantly changing and fractious party system. From that perspective, the question may be not so much whether Prime Minister Godmanis will remain in power, but for how long".

As it was, the "how long" turned out to be an unexpectedly short reprieve: on February 20, Latvia's coalition government became the second casualty of the global financial crisis, after the People's Party and the Union of Greens and Farmers - the two largest parties in the government and the Saeima (Parliament) - announced they had lost confidence in Prime Minister Ivars Godmanis, and forced him to step down.

President Valdis Zatlers will start consultations with leaders from all political parties in Parliament on the formation of a new cabinet. However, the upcoming government will have to implement further unpopular measures to cope with the worsening economic situation, and an early election remains a distinct possibility.

The full text of Manuel's background on the current political crisis can be found here.

Record GDP Contraction In Estonia

Estonia’s economy contracted at the fastest year on year rate in at least 15 years in the fourth quarterof 2008. Commenting on the news the Estonian Finance Ministry restricted himself to the obvious, "the recession may deepen this year", he said. The economy shrank an annual 9.4 percent, the second-worst performance in the European Union (after Latvia), following a 3.5 percent year on year contraction in the third quarter. The contraction was 4.2% quarter over quarter. That is 16.8% annualised. Absolutely horrible.

“This is the worst economic crisis in Estonia since Estonian independence” in 1991, Lars Christensen and Violeta Klyviene, analysts at Danske Bank A/S said in an e-mail today. “Nobody can now deny that the crisis in the Baltic economies is at least as bad as the Asia crisis of 1997-1998 or the Argentinean crisis of 2001-2002.”

Is Latvia still headed for an early election?

Guest Post by Manuel Alvarez-Rivera,
Electoral Resources On The Internet

The economy is in crisis, and expected to decline by as much as ten percent this year. The coalition government's hold on power is shaky at best, following public protests that turned violent. An embattled cabinet minister tenders his resignation. This may all sound very familiar, and it should: recent developments in Latvia appear to be at times almost a blow-by-blow re-enactment of the events that took place in Iceland last month, which culminated in the collapse of that country's coalition government.

That said, the four-party coalition cabinet of Latvian Prime Minister Ivars Godmanis remains in power for the time being, having survived a parliamentary vote of confidence on February 4. Nonetheless, an early general election - one year ahead of schedule - remains a distinct possibility: last January, President Valdis Zatlers threatened to propose dissolving Latvia's unicameral parliament - the Saeima - by March 31 unless it passed constitutional amendments that would give voters the right to propose the dissolution of the legislature.

The President of Latvia is constitutionally entitled to propose the dissolution of the Saeima. A national referendum is then held on the proposal, and the Saeima is dissolved and fresh elections called if a majority of votes is cast in favor of dissolution; otherwise, the president is automatically removed from office, and the Saeima proceeds to elect a new president to serve for the remaining term of office of the removed head of state. If an early poll does indeed take place, it would be carried out under Latvia's relatively straightforward proportional representation system, reviewed in Elections to the Latvian Saeima (Parliament) (which also includes nationwide- and constituency-level results of the 1998, 2002 and 2006 parliamentary elections).

As in Iceland, there is widespread discontent with the political establishment, although that sentiment appears to run far deeper in Latvia: recent surveys indicate trust in government has falled to its lowest levels since 1996 - only one in ten residents of Latvia is satisfied with the government's work - while a Latvijas Fakti poll taken last January shows that just two opposition parties - the pro-Russian Harmony Center and the populist New Era Party - stand above the five percent threshold required to secure parliamentary representation.

However, even if such an extreme outcome were to actually occur - the poll numbers were skewed by a very large number of respondents (fifty-four percent) that were undecided or indicated they wouldn't vote - it would be in keeping with persistent trends in Latvian post-independence electoral politics, in which every parliamentary election brings a different winner from the preceding vote, along with a wave of usually drastic changes in the party composition of the Saeima.

Governments in Latvia are usually short-lived - since regaining independence in 1991, the Baltic republic has had more than a dozen cabinets - in no small measure because of its constantly changing and fractious party system. From that perspective, the question may be not so much whether Prime Minister Godmanis will remain in power, but for how long.

Message To Ilmars Rimsevics

Hi,

"devaluation is a poison" and that "only pseudo-economists suggest Latvia devalue".

In this regard, it might be appropriate to consider the analogy with a pile of sand presented by the science journalist Mark Buchanan in his book Ubiquity: Why Catastrophes Happen. As a child, almost everybody has been building sand castles. We remember quite well that initially every single grain of sand which is added to the pile makes it bigger. In time, however, a certain point is reached, where the next grain causes a landslide instead of adding to the size of our edifice. Moreover, it is important to note that it is next to impossible to predict either which particular grain of sand will cause the landslide or how great and significant it will be. The author has a theory that this unpredictability is related to the instability that is unavoidable in the development process of any system. According to this theory then, even the most important events do not have special or extraordinary causes. These events can result from any, even the most insignificant of causes: a mere grain of sand that under different circumstances would probably be totally inconsequential and harmless.
Opening Remarks by the Governor of the Bank of Latvia Ilmars Rimsevics, Conference hosted by the Bank of Latvia - Latvia on Its Way to Prosperity: Growth Potential and Development Prospects, October 18, 2006.

I have one simple question. Given the latter, how can you be so sure of the former?


More opinions today.

Baltic Business News quotes economic analysts Hardo Pajula to the effect that the EEK has already effectively devalued, sinceit has lost its value since if a person loses half of income, "it’s the same as devaluation" (is this so hard to see, Edward).

“Devaluation is worsening of everyone’s standard of living at once and we have no escape from that in the near future. EEK has devalued for many of us since their incomes are smaller. Currently the devaluation moves from an individual to individual,” Pajula said.

Also Erkki Raasuke, Swedbank Baltic CEO has warned that "if the state cannot make the necessary cuts we’ll all go bankrupt".

“If Estonia can’t go necessary cuts, we’ll go bankrupt. There are examples to take and one should mostly look at Iceland. Problems are different, but it still should be terrifying enough to discipline us,” Raasuke said. “One option is devaluation here and not with all its destructive after-effects. Then we have that option politicians currently try to do – through deflation, decreasing the costs. Here the first question is discipline – are we capable of doing it? If we hesitate, we should pick the first option,” Raasuke said.

Please feel free to paste more "pseudo economic" opinions in comments if you find any.

Are Baltic labour markets really so "nimble", Maive Rute, SMEs’ competitiveness director at European Commission doesn't seem to think so:

“The relative inflexibility of the labour market is an issue that decreases the entrepreneurs’ readiness to create jobs and that especially affects the potential investors, who are interested in the attractiveness of the area. Our current legislations are rather inflexible compared to that of the EUs,” said Rute about the Commissions’ recommendations at that time.

Also Latvia's president Valdis Zatlers said on Tuesday that the country may fall deeper into recession than the 5 percent downturn currently forecast. If this is correct, then Latvia's situation would seem to be more critical with every passing day. Latvia's problems as a result of Parex (and related items) seem to be much more serious than Estonia's (ie it would be technically easier for Estonia to devalue), and the threat of credit downgrades and government debt which may be pushed over 60% of GDP put the eurozone 2012 exit strategy increasingly at risk. I think instead of talking about pseudo economists it would be better to come up with some practical solutions which have some hope of success. I think it reasonable to ask everyone to make sacrifices in a situation like this, but only sacrifices for a programme that can bring results.


Update

Erkki Raasuke, head of Swedbank Baltic unit also said that Estonia needs to cut state spending by 30 percent or face “bankruptcy.