Latvian Debt Crisis Only an Issue if You Are Latvian?

Remember when Eastern European bank exposure was a major "Black Swan" event? Those were the days... way back when. Like 3 months ago. [Mar 2, 2009: NYT - Ukraine Teeters as Citizens Blame Banks and Government] [Feb 18, 2009: WSJ - Banks Reel on Eastern European's Bad News] [Feb 27, 2009: John Mauldin on Yahoo's Tech Ticker]

This was in fact one of my 2009 Outlier Predictions. In [Dec 16: 13 Outlier 2009 Predictions] we wrote

#12 Wildcard/Europe: Potential defaults on debt arise in a host of smaller countries - especially of the Eastern European variety. I don't know which ones, but they have been mini U.S.'s, borrowing over and above their heads, but unlike the U.S,. do not enjoy the fact the entire world rushes into their debt market when a crisis emerges. The opposite will happen - Iceland & Ecuador are just the precursor.

This one is "in the bag".

Why do you care about Latvia? You don't... we're Americans. We only care about ourselves. And now apparently China. Everything else is just details. But it's the #1 story in some UK papers. Now granted a small country like Thailand pushed the entire Asian region into crisis a decade ago as there is generally a domino effect, (Russia also went bonkers at the time) but ... well, let's just say 'green shoots' and smile at each other. Did this even make CNBC America?

Via UK Telegraph

• Latvia has become the first EU country to face a sovereign debt crisis after failing to sell a single bill at a treasury auction worth $100m (£61m), prompting fears of a fresh storm in Eastern Europe as capital flight tests currency pegs.

• The central bank has been burning reserves to defend the lat in Europe’s Exchange Rate Mechanism, but markets doubt whether Latvia has the political will to carry through draconian cuts in spending – or whether such a policy even makes sense at this stage.
• Tremors hit bank shares in Stockholm and triggered a sharp fall in Sweden’s krona. Swedbank, SEB and other Swedish banks have $75bn of exposure to the Baltic states, and face cliff-edge losses if the pegs snap.
• Fresh turbulence in the ex-Communist bloc would rattle West European banks, which have €1.3 trillion of exposure to the region. “We haven’t yet seen the full extent of the crisis in the East European banking system. Defaults are creeping higher,” he said.

Do you realize how little $75 Billion is nowadays? That little amount solved ALL 19 of the US banks "stress test" issues.

• “Latvia may be a small country but it has vast repercussions for the region,” said Bartosz Pawlowski, of BNP Paribas. “If the currency breaks in Latvia, it is likely to break in Estonia and Lithuania as well, and perhaps Bulgaria, with effects on other countries like Romania.”
• Latvia, a Baltic country of 2.2 million people, last year had gross domestic product of about $34 billion. But output plunged in the first quarter and is expected to contract by about 17 percent for the year. The government is struggling to reduce its budget deficit, which is estimated at about 9.2 percent of gross domestic product. The I.M.F. had agreed to a revised budget deficit of 7 percent from the original 5 percent, and meeting the current target will not be possible without further budget cuts.
• The G20 deal in April to triple the IMF’s fire-fighting fund to $750bn has reduced the risk of a currency conflagration, but while the larger reserves will buy time, it does not change the fact that some countries have taken on too much debt.
• Latvia’s premier Valdis Dombrovskis warned against a devaluation “quick fix” but may have fuelled the flames further by admitting that the lat is overvalued by a third. “If we’re talking of devaluation, it definitely won’t be less than 15pc. It’ll most likely be 30pc. Real incomes will shrink very fast. The immediate shock will affect absolutely everyone and everything,” he said.
• Fitch Ratings says foreign debt maturing in 2009 is equal to 320pc of foreign reserves.
• The finance ministry expects GDP to contract 18pc this year. House prices have fallen 50pc , the world’s most spectacular crash. A third of the country’s teachers are being fired and public salaries will be slashed by up to 35pc to meet bail-out terms imposed by the IMF and the European Commission. The policy risks a deflation spiral that defeats its own purpose. (my recommendation is to print money and throw it at the people, and especially your country's oligarchs - works fantastic here)
• “The level of adjustment is too extreme and it is testing the social and political fabric of the country,” said Tim Ash, from the Royal Bank of Scotland. “You have to ask whether they are sacrificing the Latvian economy to protect Swedish banks. It would be better to devalue now and clear the air.”
• Leaks suggest that the IMF favours devaluation, the normal cure for countries that overheat. It was overruled by the European Commission, deeming retreat from the ERM peg to be a threat to Europe’s fixed-exchange orthodoxy.
• Mr Ash said the crisis was playing out much like the final days of the Russia debacle in 1998 and the end of Turkey’s crawling peg in 2001, with momentum building until a critical point of no return,

Oh well, if there is one thing I've learned in the markets, is it you don't pay attention to something, it doesn't exist. So consider the Latvian problem "solved".

I don't have the link, but I saw that Europe now thinks it should pull off the same scam as the U.S. - create a "stress test", let everyone pass and make the crisis disappear into the ether. Because as long as government puts its stamp of approval on it, we need to believe. I do have to say frankly folks - that was the best dog and pony show I have ever seen... a change of an accounting rule here, a stress test there, billions upon billions of futures buying at appropriate time and it's as if none of this happened.

On a kind of amusing related note - Putin is out-shaming his oligarchs as anti-rich sentiment rises. Thankfully, with oil surging the "oil economy" should be back soon.

• Vladimir Putin, the Russian prime minister, publicly criticised his most faithful oligarch on Thursday in an attempt to deflect growing social discontent on to the country’s unpopular super-rich.

• Mr Putin, who is a master at dispensing ritual humiliation, likened Oleg Deripaska to a cockroach and forced him to accompany him on a tour of Pikalevo, a factory town that has witnessed the most serious social unrest Russia has seen since the start of the global economic crisis.
• Last week Pikalevo’s residents vented their anger over job losses and unpaid wages at one of the oligarch’s local factories by blocking a major road and causing a 250-mile traffic jam. The unprecedented protest reportedly worried the Kremlin, which has long been afraid that Russia’s imploding economy could cause serious political unrest.
• Anxious to ensure that the Pikalevo problem remained an isolated one, Mr Putin sought to cast himself as the town’s saviour – and Mr Deripaska as its villain.
• “I wanted to bring here the authors of this tragedy, whose greed and ambition have made thousands of people hostage to this situation,” Putin said on state television. “Where is the social responsibility of business?”

And...

• The Kremlin touted the resilience of the economy at yesterday’s opening of the “Russian Davos” in St. Petersburg. BP Plc, Citigroup Inc. and Royal Dutch Shell executives and 2,000 guests heard little of nearby protests against what Premier Vladimir Putin called corporate greed.

Oh that's just rich...

[Dec 22, 2008: WSJ - Oil Crash Stirs Unrest in Russia & Protectionism on the Rise]

Comments

[TheSnail:]

hmmmm..... time for some green-shoot tea....I believe.....yummie

Jun 07 07:43 PM

[John Galt:]

I clicked the link and looked at your predictions and must say that I am impressed. Predicting the future is a dangerous beast but your predictions were as good as any and I say that knowing how difficult it is.

Thanks for the good work Trader Mark.

$

Jun 08 10:26 PM

[TraderMark:]

Thanks John

However those outlier predictions above are things that I was taking a shot at that might or might not happen

My true predictions are all laid out in the blog in chronological order

Aug 2007: www.fundmymutualfund.c...

Dec 2007: www.fundmymutualfund.c...

Nov 2008: www.fundmymutualfund.c...

Specific call on home prices falling in Dec 2007 when pundits said it could never happen nationally: I said we're heading to median 160Ks from median 220Ks: www.fundmymutualfund.c...
I have plenty of others along with calling out a lot of overpriced stocks and sectors. From time to time the market disagrees for 2-3 months and goes on "bull runs" and I am called a "perma bear"... I call myself a realist.

I'm more than happy to put my economic record up against anyone the past 2 years - the parade of pundits they bring up on CNBC, 99% of them got almost all of this wrong.


On Jun 08 10:26 PM $ John Galt wrote:

> I clicked the link and looked at your predictions and must say that
> I am impressed. Predicting the future is a dangerous beast but your
> predictions were as good as any and I say that knowing how difficult
> it is.
>
> Thanks for the good work Trader Mark.
>
> $

Jun 09 11:40 AM

[Graham and ...:]

I addressed this point in my instablog "As Goes Latvia, So Goes..."

The fact of the matter is that what goes on in Latvia has potential domino effects all over northern and eastern Europe. As such, it could eventually impact western Europe and even the United States.

My rhetorical point was so goes, "hopefully, not much." But the conclusion was "that is a lot to be hoping for."

Jun 09 11:54 AM

[doubleguns:]

“I wanted to bring here the authors of this tragedy, whose greed and ambition have made thousands of people hostage to this situation,”

Could be a line from BO concerning the bondholders at Chrysler.

Jun 09 03:52 PM