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.