Comments on: Non-performing Loans In Latvia

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Tue, 08 Nov 2011 22:42:54 +0000

By: Edward Hugh

Edward Hugh — Thu, 14 May 2009 08:07:23 +0000

Hi Haraldo,

“The nominal devaluation course does less damage to Latvians but more damage to the Swedish banking sector which gets wiped out straight away.”

Well basically I think you are scratching round in the right area. The impact on the Swedish banking sector is one of the important considerations. However, I don’t think we should go overboard here. The thing is, the IMF were only talking about a 15% devaluation possibility initially. I am not convinced such a managed devaluation would have wiped the Swedish banks out overnight. Indeed, it could well have been in the banks’ interest.

Now we have an 18% contraction in activity, and lots more to come.

Do the sums. A “managed” devaluation would not have been anything like as bad in comparison as the scaremongers were saying. The pity was too many people didn’t understand enough basic economics, and many of those who didn’t understand the basic economics were taking policy decisions in Latvia, including over at the central bank.

Having said that, devaluation or no devaluation, things were always going to be hard for the Baltics after the boom-bust. And then there is the underlying demography to think about. So I am certainly not trying to hold out any simple “quick fix” panacea.

Obviously all those who had significant debts were very very nervous about devaluation at the start. As time goes on what we could call the “throwing the towel in” rate is evidently going up. So yes, we should expect to see changes in attitudes, and Latvia may well change course at some point, but now the banks will be sure losers, since the default level is likely to go well above what it would have been had the contraction been more “contained”.

Of course, it is easy for many to see this after the horse has bolted, but I was saying it before it bolted.

By: Links: 2009-05-13 - Credit Writedowns

Links: 2009-05-13 - Credit Writedowns — Wed, 13 May 2009 14:04:51 +0000

[...] “Just when it appeared the tide of popular opinion had turned against the chance of a resolute rebound, some economists have begun to return to the belief Canada is headed for a strong recovery buoyed by the need to replenish the massive drawdown in inventories.” Rebound yes, but how robust? It will certainly be more robust in Canada than in the U.S.Non-performing Loans In Latvia – Edward Hugh [...]

By: Haraldo

Haraldo — Wed, 13 May 2009 09:12:43 +0000

“other things equal, a nominal devaluation and a real depreciation achieved through deflation should have exactly the same effect on debt service (unless some of the debt is in lats rather than euros, in which case devaluation would do less damage.)”

Damage to whom? The deflation course does more damage to Latvians but less damage to the Swedish banking sector as it has more time to earn its way out of the hole. The nominal devaluation course does less damage to Latvians but more damage to the Swedish banking sector which gets wiped out straight away. Seeing as Sweden is providing the funds for all this, taking the current course is not suprising.