milkguy

Are Baltic Countries the Next Black Hole?

Baltics cannot be seen as one group. Lumping the Baltics together is about as adequate as lumping the Eurozone together (Germany to Greece).
Estonia is very likely to meet Maastricht criteria for 2009. No country already in Eurozone is likely to do it (maybe bar Luxembourg). 2009 state budget was cut by 9% of GDP to meet the ECB ceiling of 3% deficit. As of today, it is 95% done.
Public debt is only 4% of GDP, the lowest in Europe. No T-bills have ever been issued. Current account is at 6-7% surplus (up from 15% deficit in 2008). The only bad spot is private debt that did get out of hands during the boom, but will probably also be cut by 6-7% this year alone. If this is not an economy with its feet firmly on the ground (bottom), then which one is?

Yes, it's been bloody difficult.Unemployment is at 14% and growing. Car sales is lowest since 1997 (down 80% from year ago). However, labor costs are down average 20% for private companies already. This means that deflation works, and does so very well. Deflation is good, as it forces real structural changes in the economy, punishes those who overspend and rewards the prudent. Devaluation does exactly the opposite and therefore solves no problems, only postpones them.

I cannot see, how anybody can draw any parallels between the Baltics and Greece against this backgound? OK, Lithuania is trying to borrow itself out of the crisis - but lower private debtload allows to do it. Latvia is so knocked out that it has nowhere to fall anymore, unless there is some kind of political crisis again.
In this regard, Baltics are way ahead of Greece in recognizing the problems and giving adequate response.

It's All Greek to Me

The biggest joke about Eurozone is that the only country inside and outside the EZ in Europe that meets the Maastricht criteria for 2009, may not be allowed to join. Reason: interest rates of T-bills (one of the criteria) cannot be measured as these have never been issued.

Global Economic Crisis Far from Over - Especially in Europe's Periphery

Mr Hugh continues to amaze me. Eastern Europe is doing exactly what it is supposed to do - cut back spending and re-balance the economies after the bubble years. I could not understand his arguments here, what's wrong now? Cannot spend enough? C'mon the problems arose from too much spending in the first place. The path chosen in the Baltics is exactly right - let the economy contract to adjust the structure of economy with post-bubble reality, which includes necessity of running sizable CA SURPLUS for a reasonable period to pay back the excessive foreign borrowing. Sure, it involves high unemployment. Sure, it involves sizable bank losses. But how on Earth can you fix the past mistakes? You need to have some car salesmen unemployed for some time (Estonian car sales are now down 90% from top at 10 year low) to get them move into productive industries. That's called restructuring.

It seems to me that mr Hugh has to somehow justify his doomsday calls from earlier this year. He is looking increasingly stupid (along with Krugman, Roubini, Rogoff) with his "devalue or die" calls - some people are simply unable to see alternative options. At least Estonia and Latvia have their feet already firmly on the bottom. Unemployment and bad debts continue to grow for some time (probably years), but private sector in these countries has adapted with the new realities incredibly fast and I would not exclude a new boom soon, based on way more sound principles, if the external demand continues improving.

The IMF Imposes New Conditions on Latvia

Gtarras,

Your comment demonstrates your complete ignorance about the issue. All residents in Latvia are equal in terms of employment and benefits. True, there are people who have chosen not to apply for Latvian citizenship or have taken Russian citizenship, but it makes zero difference in the labor market or benefits eligibility. What matters is residence permit and everybody has one.

BTW Massive majority of Latvian businesspeople are native Russian-speakers.

13 Agriculture Myths Busted: This Bubble Is Ready to Pop

I am also highly sceptical about "investing" in farmland without actually running an operation. Farmland is a living ecosystem that needs careful management, when it is done correctly, its intrinsic value goes up in time (appreciation vs depreciation of other assets). If it is used wrongly, the resources are depleted and the intrinsic value (capability to produce) can go down very fast and is very expensive to restore. There comes the problem of outside landlords: you don't want short-term tenant, because he will take whatever he can quickly and then you are left with depleted land. On the other hand, having truly long-term tenant decreases your bargaining power. I have no idea, how farmland investors intend to deal with this issue.

Agri-commodities "bubble" is a whole different story, though. The prices jumped in 2007 because for the first time in decades the world was running out of grains and dairy products. Of course, plentiful money supply amplified the move, but still the key reason was shortage in physical grain supply. And this was not one-time effect, this situation took almost 20 years to develop, as the biggest surpluses in food were recorded in early 80s.
The subsequent crash in prices was leveraged on the way down with shrinking money supply, just as it was leveraged on the way up. The key reason for price decrease was still the bumper crop of 2008, partly due to excellent weather conditions everywhere (rare event!) and eager response to the jump in prices.
I remain unconditionally bullish for grains, though. Very light inventories worldwide are a fact; growing consumption is a fact as well. My bet is that the demand keeps on rising at its longer-term trendline, while supply increase will be much slower to come along - the farmers have fresh experience what consequences the increasing supply can bring along. Therefore, in order for the supply to increase similarly, the prices must either shoot even higher that during the last boom; or somewhat lower prices must hold for significantly longer. Otherwise the farmers will not move, they will simply accumulate cash or pay back debt instead of investing in expansion.

Are the IMF and ECB Lining Up Against the EU Commission over Latvia?

Latvia has now a current account surplus and LVL in circulation is fully backed with currency reserves. Why do you think breaking the currency peg will lead to DEvaluation? I would rather bet on REvaluation due to short squeeze. Don't forget, it is a very small economy and thus behaves by micro- rather than macroeconomic rules. One bet by a decent-sized (not BIG) hedge fund will change the picture more than any "macro" data.

Latvia's Collapse Threatens Europe

This is one big bs... . Latvia wins nothing from devaluation, as any positive effects are counterbalanced by the rise in loan service costs (practically all private sector debt is denominated in euros). In addition, Latvia's current account is now firmly positive. They have no other way, but to cut costs heavily, both in public and private sector. If GDP falls back to 2002 level, then associated costs must do the same. Sure, it may be difficult to imagine an across-the-board 30% pay cut to ALL public employees in America or W Europe, but that's ultimately the only way to regain competitiveness.

Moreover, devaluation pundits, I believe that in the long term devaluation is the worst solution - basically it punishes the prudent (savers) to bail out the reckless (debtors). In the long term we need savings and capital investment for sustainable growth.

The Agriculture Re-Boom Is Coming

Plantinseeds,
the fundamentals have really not changed from last year. Indeed, the agri-commodities crash in late 2008 was due to general correction of commodity prices and exceptionally good 2008 harvest in almost all major grain growing countries.
So far, 2009 has already proved way worse. Besides Argentina, we can already basically write off US and Canadian spring wheat crop. Simply too late to drill already. My feeling is that wheat will see most fireworks this year, if the Stormx drought forecast for East Europe is realized, then watch out!
If the Andrew's scenario becomes true, I expect the high prices last longer than in the previous case - simply because the violent volatility of the last few years has seriously discouraged the farmers to invest and take risks. Lots of people who responded the high prices by expanding acreage and adding inputs, are still under water from the subsequent crash - it takes serious prices for long time to motivate them to take those risks again.
I must note though that in longer term, there IS a very considerable "soil reserve" available that will have a big impact on the grain prices 5-10 years down the road. This is Russia, Ukraine and Kazakhstan - those three could feed the whole world, if the efficiency of their agriculture were raised to US/European standards. It takes a HUGE investment, though, not only in tractors and combines, but also the supporting infrastructure (elevators, railways, port terminals) and foremost in people and R&D. Probably a trillion $ or so project, but it will happen if the prices stay high long enough. Meanwhile, if you're invested in agriculture elsewhere, enjoy the show and get out in time!

Potential Eastern European Economic Collapse Worries Me

cyclops3,

Yes, foreign currency denominated mortgages are a major mistake. I find it especially irresponsible in the countries with fluctuating fx rates, such as Poland and Hungary. If homeowners' main future expenditure stream is tied to PLN/SFR exchange rate, it could as well be tied to solar activity or weather patterns on Hawaii - has nothing at all to do with the real economic environment of the family. This could get real painful if Swiss economy improves and usually-prudent SNB hikes interest rates. The borrowers get higher interest rates AND higher principal payments together.
In Baltics (and Bulgaria) the situation is a bit different, as the borrowing goes on in EUR and the home currencies have fixed exchange rates to euro as well. This means that currency risk for these borrowers equals the risk of currency board going under. On one hand, that makes the situation more dramatic, with all sorts of pundits busy forecasting the big D-Day - when it comes, it is supposedly huge. On the other hand, at least Baltic economies are so completely EUR-based already, that very few would practically benefit anything from devaluation of the currencies. Therefore I believe more in the ongoing deflationary adjustment - hefty cuts in both public and private budgets to regain competitiveness. Latvia is in the most difficult position, by some accounts they should cut the 2010 budget by 40% to make the ends meet - very heavy. A positive note is that cutting expenses at the time when everybody else in the world is spending like hell, means painful today, but much more pleasant future.

Potential Eastern European Economic Collapse Worries Me

Eastern European "current account deficit problem" is a huge piece of nonsense. The whole thing was caused by W European banks themselves by pushing huge loads of liquidity into these economies in order to gain market share. There was no way this tsunami of cheap financing could be absorbed in these still small economies, so it went straight back to W Europe in form of imports. Essentially, financial account surplus came first and then caused trade account to go in deficit, not vice versa as we have been used to.
Now that the banks have cut or even reversed the financing flows, all the "imbalances" have disappeared overnight. Trade is in balance, bank lending conservative ( but not stopped!) and real estate affordable again even at sharply decreased income levels. If the external demand return, I see E Europe to have major upside, not downside risk. Unemployment will probably grow to 15% range, but that's inevitable considering how many people were busy at building and selling the real estate bubble. It takes time to get them employed at something reasonable, meanwhile it helps to keep labor costs in check.

The New Pillars of Inflation

I find this approach very interesting. May I draw your attention to another aspect - namely how will the aging of European and American farmers influence the food markets in relatively near future. Average Western farmer is in his late 50s and the average age practically grows a year higher as another year passes by. Agriculture has been wildly unpopular field of activity for decades - hard, stinking, risky and low-yielding. No wonder all the brains tried to get away as far as possible for generations.
My question is - what happens in 5 years, when average Joe or Jean Farmer will retire? Who's going to fill these boots? My guess is that we will see A LOT higher food prices, especially dairy, simply to attract new people into the business to keep it running.