01 January, 2009

IMF Bailout for Latvia a serious mistake

The devauation of the Lat would assist Latvia remain competitive through exports.

The UK pound has lost around 30% of it's value while Latvia's Real Effective Exchange Rate of the Latvian lat shows that the Lat if not pegged would have depreciated around 40%.

Here is the best detailed analysis I have found http://fistfulofeuros.net/afoe/economics-and-demography/why-the-imfs-decision-to-agree-a-lavian-bailout-programme-without-devaluation-is-a-mistake/#comment-23006

My answers to the above are following:

What loan defaults? The banks are not so concerned about defaults.

1. The central bank in Latvia charges 3 x higher Rigibor interest on Lat loans versus Euribor loans so they are encouraging a move to euros.

2.The Latvian branches of Scandinavian banks are charging at least 3 x times higher base rates on euro loan restructuring. So if families are supposedly hurting, then banks don’t agree, or they are taking advantage of people in distress.

3. Scandinavian banks have already accounted and budgeted for defaults in Latvia. so for them the risk has passed.

The IMF is culpable as many Latvians expected the Lat to depreciate and salted away funds to get through the adjustment. Now with a high lat making Latvia uncompetitive these saved funds will be drawn on until depleted.

I have substantial euro loans and I want the Lat to depreciate. A depreciation in line with the UK and Poland etc would keep Latvia competitive and me in business. But now the IMF idea will cause Latvia to go in to a depression.

Having loans in euros and not lats means more than the theory of having favourable exchange rates. Being subjected to eurowide professional policy is the advantage and not the exchange rate. A pegged rate never did provide any exchange rate advantage.

The IMF debt has to be denominated in Lats so that repayment is in lats. I for one will protest an IMF expecting a euro repaymant when the lat finally crashes.

How could there be inflation in Latvia when PVN is going up 16% for my businesses?

The problem has always been that the Latvian government has done next to nothing to improve exports. The Foreign Investors Council in Latvia has a Board member that openly stated that they do not want to go to the effort to attract any members that export as their objective is to feather their own nests.

The IMF should force policy that makes Latvia competitive and stop with the silly theory about loans in euros.

2 comments:

Gerry Jacobs said...

Dean,

I have yet to see any Latvian biz that will flourish if the Lat depreciates - apart from certain export-oriented services - such as organizing stag-nights for Brits.

If your salaries are too high, then lower them. If you are uncompetitive then no amount of devaluation will help you.

Any Lat depreciation would immediately increase inflation and eat up your profits again.

In your Hotel/Hostel biz immediately costs for energy, food, cleaning, telecom and interest on your loans etc. would shoot up.

As far as I can see, your biz has been so far subsidized as you enjoyed a 5% VAT rate while the rest of us had to charge 18%.

A VAT increase is inevitable though as it is one of the few taxes where its hard to cheat. Companies have been lowering official salaries to minimum levels to avoid taxes. Charging the same VAT for any type of biz is just fair.

You are of course right regarding that export oriented industries have been largely neglected so far.

Cheers

Australian Chamber of Commerce in Latvia said...

Gerry:

My post was about devaluation and the benefits for export. If businesses would not benefit then why do countries that can devalue like Russia proactively devalue?

Your comments about my business I find typical of people that are not willing to self sacrifice for the greater good. You assume I think like you and I don't. It is offensive to go to personal expense to assist others and then have such assumptions cast my way.

My hostel has banned Stag groups for many years so it is not them that my business relies on.

Because I pay full salaries with full taxes I am firing 5 staff. If I was willing to do black then why fire. It is the decrease in turnover causing overheads to be too high that results in staff cut backs.

PVN for Hotels should have been increased from 5% to something higher 3 years ago. If that was done then I would not have so much competition that pays black and competes on price only.

My concern is with Latvia being an international competitive country.

Economic theory states that inflation will go down with a devaluation because imports will be less desirable to consume. However, the PVN could easily be increased to 25% to counter inflation.

A devaluation only has to be inline with floating currencies to give Latvia a chance at improving exports.


Regards from Dean