Here’s the concluding statement of the most recent IMF visit to Lithuania.Â As with the Spain statement of a few days ago, it is noteworthy for its bluntness — these things read much less like bland compromise statements than they used to.Â A basic indication of how troubled things are —
with real GDP only recovering its pre-crisis levels in 2014/15
And even that doesn’t take account of population growth.Â So in terms of levels, this is going be at least a 6 year slump.
The broader context is that Lithuania is illustrating that the commitment to a fixed exchange rate (aÂ currency board in this case) shifts the burden of adjustment not just onto the domestic economy in general but banks in particular, since the deflation imperils debt repayments.Â The country’s banks have a non-performing loan ratio of nearly 20 percent — there was a time when we used to worry about such ratios getting near 5 percent (since that alone would be enough to wipe out most bank capital).Â Nonetheless, Lithuania has managed to keep the showÂ on the road through huge official fiscal support (IMF, EU, Nordics etc) some accelerated EU funds, a European Investment Bank loan, andÂ bank capital from foreign parents of domestic banks.*
But that still leaves a lot of loans that can’t be repaid.Â The Fund is wary of trying to graft a new bankruptcy codeÂ into this mess —
Restructuring efforts should continue to be based on a voluntary approach. Initiatives that seek to introduce mandatory moratoriums on debt payments risk increasing the level of non-performing loans in the banking system and delaying the recovery of solvent borrowers.
But outside of large corporate and sovereign debtors, it’s not clear how well a voluntary approach works, especially much of the “voluntariness” relies on the leverage, so to speak, of owing someone a lot of money.Â Ireland is another case where the government has put most of its effort into writedowns for large property debts, but leaving household and small companies at the mercies of an archaic insolvency system.Â In effect, personal bankruptcy in Ireland is the Hotel California in reverse — youÂ can leave any time you want, but you can never check out.Â The MinisterÂ for Justice says he’s pondering what to do about it.
Anyway, the question coming from all this is: can you do a severe fiscal contraction along with domestic price adjustment and protect your banking sector at the same time?Â For a crisis that began in summer 2007, it’s a little surprising that we don’t yet have clear direction on that question.
*Thanks to Mark Allen in comments for catching an earlier mistaken description of Lithuania’s external funding, which has not involved IMF funds and in which capital marketÂ access was retained.