Comments on: Latvia – Devalue Now or Devalue Later?

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By: Latvias flate skatte- regime stÃ¥r for fall | Etterretninger - Mandag Morgen

Wed, 02 Sep 2009 13:11:48 +0000

[...] er at Latvia er i dyp Ã¸konomisk krise. De statlige finansene er sÃ¥ hardt presset at offentlig ansatte har mÃ¥ttet kutte lÃ¸nnen med 20 [...]

By: govs from Latvia

govs from Latvia — Wed, 10 Jun 2009 15:28:20 +0000

“Countries can technically meet deficit or other targets in the short-term by sacrificing longer-term sustainability.” This is a perfect definition of reforms and mechanistical budget cuts going on in Latvia. All R&D expenses have been cancelled in one day. For sure, any remaining viability is sacrificed to meet numerical target characteristics and therefore Latvia will never meet viability criteria for EUR zone accession.

By: PDR Vet

PDR Vet — Wed, 10 Jun 2009 15:18:05 +0000

Ed — I agree that indicators to measure the success of the adjustment would be helpful. My point was more that there seems to be a role for constructive ambiguity in the context of program implementation. Otherwise, the situation would be easily gamed. You don’t want a situation where markets react very negatively when a country misses some pre-announced indicator especially if the broader context is reasonably positive. I think the Fund avoids doing this to provide flexibility and allow it to cut the country a break when they’re trying hard to do the right thing. If they’re locked into to specific indicators, then the Fund’s credibility ends of driving determinations of program implementation.

Finally, there’s also a quality vs quantity issue. Countries can technically meet deficit or other targets in the short-term by sacrificing longer-term sustainability. But if the indicators are public, this gives the country the ability to demand a disbursement even though the measures are not genuinely helping the situation. Mkts will often see through this anyway which then makes the indicator less meaningful.

By: » Przyczyny cyklu koniunkturalnego: Å‚otewska lekcja Trystero: NiezaleÅ¼ny blog finansowy

Wed, 10 Jun 2009 10:16:40 +0000

[...] trzymaÄ‡ siÄ™ sztywno warunkÃ³w konwergencji to Åotwa do strefy euro nie zostanie przyjÄ™ta. JeÅ›li nie zdecyduje o tym wysokoÅ›Ä‡ deficytu budÅ¼etowego to szanse Åotwy przekreÅ›li stosunek dÅ…, ktÃ³ry jeszcze w 2007 roku wynosiÅ‚ 9% a wedÅ‚ug prognoz, ktÃ³re na 100% sÄ… zbyt optymistycznie, [...]

By: govs from Latvia

govs from Latvia — Tue, 09 Jun 2009 21:07:19 +0000

Dear Gatis,

unfortunately, nobody can tell how it will look tomorrow. A budgetary cut of 550 Mio on government and consumer spending side (no overvalued big development projects are affected by this cut) will decrease at equal proportion the GDP and expenditure in short-term, and cause accelerated GDP decrease in mid-term due to cancellation of R&D. No exit strategies are at the horizon.

By: Gatis

Gatis — Tue, 09 Jun 2009 20:43:08 +0000

Latvian governemt just managed to come to an agreement on 500 million LVL budget cut.
So I believe that it is not that bad as it seemed yesterday.

By: govs from Latvia

govs from Latvia — Tue, 09 Jun 2009 20:07:16 +0000

I did not, however, NOT understand how the control for the contagion risk can be effective in the present setup. Devaluation in Latvia will put very strong tension on currencies in Estonia and Lithuania but also in Poland. It may seem surprising how Latvia with 2,3 Mio inhabitants can influence Poland with 40 Mio. However, Latvia has 1/3 of Polandâ€™s territory. At the present Poland has squeezed out Baltic agricultural goods from Russia and other eastern markets due to massive devaluation. If Latvia will devalue, the competitiveness of its agricultural products will return. Taking in account close proximity and superior knowledge of Russian market and language this will restore the share of Latvian goods in Russia. That will be also significant pressure on Lithuanian currency, because eastward exports are very important for Lithuania. This pattern resembles the historical Big Depression when devaluations pressed agricultural prices (whey economy). All these devaluations will occur at the open border of Euroland.

It would be just very fashionable to say that agriculture does not play any role in modern economy. However, in situation, that e.g. car sales have fallen in Latvia for -80%, we have found on our local market German cheese cushioned with abnormal export subsidies that it was cheaper as the local product, despite milk prices paid to Latvian farmers of 5-6 ct. For sure, return from German cheese is now much bigger than return from German cars.

What is the consequence from contagion threats: Latvian government has very little to decide. Probably, as the acute phase of the crisis will be over, the contagion risk will decrease with it.

By: govs from Latvia

govs from Latvia — Tue, 09 Jun 2009 19:14:44 +0000

To NWO

On goods export side it is somewhere true (except storages). However, on the import-substitution side a devaluation will be extremely efficient. Since Poland has devalued massively, all Latvian groceries are flooded with Polish food. That will end abruptly after devaluation. Poland is the only CEE country with still growing GDP because of massive devaluation.

Labor costs is another issue. At the moment they are overvalued. Investment in Latvia has negative sign for long time. After devaluation Latvia will return its attractiveness.