This is all so tragic, and so foreseeable (viz, my original post here, for example).
“Hugh puts his finger, in particular, on one gaping hole in the logic of the opponents of devaluation. We canâ€™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 â€” sharp wage cuts, and basically a major domestic deflation â€” will also make it hard to service those debts.”
Krugman on himself:
“In fact, Iâ€™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.
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 â€“ 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!