Non-performing Loans In Latvia

This is all so tragic, and so foreseeable (viz, my original post here, for example).

Krguman on me:

“Hugh puts his finger, in particular, on one gaping hole in the logic of the opponents of devaluation. We can’t devalue, they say, because the Latvian private sector has a lot of debts in euros, and a devaluation would make it very hard for borrowers to service those debts. As Hugh points out, the proposed alternative — sharp wage cuts, and basically a major domestic deflation — will also make it hard to service those debts.”

Krugman on himself:

“In fact, I’d be a bit more specific than Hugh: 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.)”

The Latvian Financial and Capital Markets Commission yesterday with numbers on domestic loans currently in arrears.

By the end of Q1 2009, loans in arrears in Latvia amounted to 20.5% of the aggregate loan portfolio of Latvian banks (up 5.5 percentage points from the end of 2008). The aggregate loan portfolio of the Latvian banks was worth LVL 16.4bn (approx. EUR 23bn) at the end of March 2009. Of the bank loans issued to households in Latvia, 22.1% were in arrears at the end of March 2009. Furthermore no less than 21% of mortgage loans were in arrears by March.

Danskebank on the Commission report:

We are quite concerned about the speed at which the non-performing loans are rising. Considering the gloomy outlook for the rest of 2009 NPLs are probably set to increase even more. We highlight that there is not a 1:1 relationship between NPLs and loan losses, but nevertheless these data cause us to believe that bank loan losses will go much higher than current levels – particularly in Latvia but also in the other countries.

And finally Krugman, who can speak for both of us here:

“This looks like events repeating themselves, the first time as tragedy, the second time as another tragedy.”

Amen to that!

This entry was posted in A Fistful Of Euros, Economics: Country briefings by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

5 thoughts on “Non-performing Loans In Latvia

  1. “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.

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  3. 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.

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