Of course, mismanagement led to increase of deposit insurance limits after PAREX bankruptcy to protect banks from Kassensturm. However, during 1995 there was no Kassensturm in Latvia (without any deposit insurance), so why it had to be in 2008? The law of deposit insurance valid at that moment provided for repay from Deposit insurance in three months AFTER FINISHING THE BANKROTT PROCEDURE. So how long would be an insolvency procedure for a bank like PAREX with lots of coded and unidentified accounts, liabilities and securities? 20 years? 200 years? The absence of insolvency procedure in case of PAREX is exactly the problem worrying the EU. Because nobody has even an approximate idea about the real liabilities of this bank. Iceland did a more clever procedure with Landesbanki with a preceding insolvency procedure and consecutive recapitalisation.

One point is clear – the old model of financial centre is dead for Latvia, so the EU can search another place where to make all the dirty business with Russia and other Eastern nonmarket economies.

In 2008 EU was afraid of butterfly effects and imposed that sick anti-market bailout of banks. In case of Latvia that meant immediate freezing of 30% of governmental budget for that purpose. As further consequence Swedish banks totally ceased issue of new loans and retracted just in Q1 2009 15% of loan market, closing credit lines for healthy companies as well (similarly to France during Heinrich Brüning Notverordnung period). Here you have the CEE problem.

Regarding major Latvian companies, that is absolutely new for me that there is something dangerous. Rail, airline, electricity, gas, chemicals, pharmaceuticals are even growing H1 2009. Wood product market is reviving. Agriculture is suffering from zloty devaluation, however, some industries as livestock are pretty well, because demand for high quality beef is high (not all want the polish chemical meet monsters). Fall in retails trade and financial intermediation is just natural. The sharp reduction in added value from internal services as education, research and health is just consequence of budget freezing due to bank bailout.

In core industries there are even clear further income sources. For instance, if Latvia will impose road tax to German levels, this will contribute +5% to national income.

By the way in year 1995 when largest bank in Latvia collapsed (together with about 5 smaller) GDP declined only 1.6%
I have a view that comparisons with pre-market(1993) GDP are with little sense – how you can rely on those when prices where set totally differently and Latvia was just province of much larger country. And in 1994 people were poor and prices were low.
1990-1997 was time of major shift when underutilized assets and labor went into more productive use.
Of course here was bubble forming in Latvian economy since 2004 when Swedish and other banks started to pump money in. But now together with hot air fully healthy companies and industries are on the brink of destruction.
Looks like Latvia is heading for full crash and program of recent government will help it happen soon.

I am here not so much to defend Latvian situation. Much more am I interested in the new unusual concepts of contagion which poses an extreme danger to EU and to anticyclical policy in the EUR zone which seems not to exist due to the fact that Spanish workers have different interests as Angela and german Opas and Omas.

GDP fall -18% is due to crash of the banking and retail sectors, as well as construction, which were overblown during the bubble. STTL, overblown banks, nobody will miss you!

We had already comparable situation. In 1990-1994 the GDP of Latvia fell more than 54%. However, if you visited Riga in this time, there was nothing extreme. People were sitting in coffeehouses, transportation and utilities were working, the criminality was higher as during Soviet times, but this was the case for all CEE. This is due to the fact that the GDP fall came from contraction of Soviet military and heavy industry which did not have much resulting impact on Latvian economy.

The present situation is similar – overblown banking sector in Latvia was heavily involved in operations with Russia and other Eastern countries. As it contracted, direct impact on Latvian economy is not so big. The real problem is that the European Union imposed on Latvia the bailout of banks which were located in Latvia, but in reality had very little business locally. This has proven to be too expensive a program for a small country which has limited borrowing ability on the global financial marketplace.

Please, take in account that the grey sector of economy is returning in Latvia very rapidly, so real fall is by far not so immense. Already half a year I am paying everything in cash. If the government has not enough money, so it must stop the big EU infrastructure projects (which must be initially paid by Latvia, and only then EU is returning something in long time period). For Latvia they are not of much added value. As through Latvia is the only safe road to Russia, if every second EU truck will get damaged on the bad roads, Bruxelles will rapidly send enough money to repair everything without Latvian contribution.

The loan asked from EU and IMF is planned 100% for bank bailout. Due to EU regulations this emerges as budget deficit, this unusual bailout. Almunia has already declared very publicly that loan is only for support of the banking system. Internally the opinion sublimates that let the banks fall, anyway they have very few real active, and build a new big state bank.

Taking in account the reality that the real economy of Latvia is based on Cargo, Chemicals, Pharmaceuticals and a lot of other sectors pretty stable during recession, it is a big question for me, if the situation in Estonia with its overblown mobile phone production and Lithuania under zloty pressure will be really better as in Latvia?

In case of Latvia there is only one problem – banking crisis. Meanwhile, information arrived this weekend that there is a big rethinking in Latvian government of banking bailout issues. There is a high probability in the present situation that the government will drop ill banks. In that case Latvia will not need any external loans because internal fundamental data is very good.

1) a problem for Angela, because she insisted that EU support must be coupled with IMFs to protect savings of German Omas and Opas from expansive ECB politics,

2) contagion danger is extreme!!!