RIGA - Fears of an imminent devaluation of the lat, however unfounded, continued to haunt both the currency and equity markets last week despite repeated assurances from Latvian officials that the currency is at no risk. Shares of Swedbank fell 8 percent from Feb. 19 's 22 on fears that the bank, which owns Hansabank, the largest banking group in the Baltics, would suffer from a possible devaluation of Latvia's currency, the lat.
Another Swedish bank, SEB, which owns Uhispank, Unibanka and Vilniaus Bank, also saw its share price take a hit, losing 5 percent over the first four days of last week.
International investors are increasingly leery of Latvia's ultra-high economic expansion 's slightly less than 12 percent last year 's as inflation persists and the country's current account deficit continues to climb. They are broadly divided into two camps: those who believe Latvia will undergo a hard landing, and those predicting a soft one.
Last week, however, a rating downgrade by Standard & Poor's threw ammo to the hard-landing camp, and investors reacted accordingly. Then, on Feb. 20 an article by the Reuters news agency, one with errors, pointing to the much-ballyhooed editorial in the Diena daily, written by a Danish economist in Riga, also fueled speculation.
Reuters wrote in its report that the editorial, written by Morten Hansen, a lecturer at the Stockholm School of Economics, had appeared in Diena on Feb. 16, when in fact it had run on Feb. 10. Reuters' international subscribers picked up on this and included it in their daily reports.
For instance, Credit Suisse wrote in its Feb. 23 Global Product Marketing research note that "speculation on a potential devaluation started to spur last Friday" 's or Feb. 16 's when Hansen's article allegedly appeared, suggesting the Swiss bank based its research on the Reuters article.
Though the mistake would seem innocuous, in financial markets all it takes is a slight error to move transactions. By mid-week, major international investment banks were eyeing Latvia. Deutsche Bank even issued a separate report on the Baltic economy on Feb. 21, in which it wrote that "current account deficit and inflation trends show signs of overheating."
The bank recommends tighter fiscal policy, but "the government's track record on this account is not encouraging."
Latvian authorities "will have to explore more stringent measures to lower domestic demand growth and reduce external imbalances from current record levels," Deutsche Bank wrote.
Nordea, a major financial services group in the Baltic Sea region, also pointed out Latvian risks in a research note last week. "In Latvia, foreign direct investment and portfolio investment together only finance 37 percent of the current account deficit," a Nordea analyst wrote, suggesting that this will put pressure on the lat, which is pegged to the euro within the ERM-II framework.
Meanwhile, in Latvia, the lat came under considerable pressure on Feb. 20 as the buy-sell spread increased within the 1 percent bond allowed within ERM-II. Traders, however, downplayed the significance of the event, describing it as a temporary glitch due to consumer jitters.
Indeed, many currency exchanges in downtown Riga raised their sale price for euros to 0.77 on Feb. 19 's 20.
Unfortunately, the knee-jerk reaction from the government and the Central Bank was not to address the core problem of the currency's weaknesses, however long-term, but to incriminate unnamed persons for destabilizing the situation and spreading rumors of a devaluation.
The Security Police have stated that they have received reports from the Constitutional Protection Bureau showing a number of text messages sent via mobile phones on Feb. 16 to the effect that the lat was about to be devalued. No arrests have been made so far.
In an interview with the Telegraf daily, Finance Minister Oskars Spurdzins admitted that "if it's possible to create such panic with one newspaper article, then this is obviously our oversight."
The minister stressed that Latvia was not planning to devalue the national currency nor has the issue even been discussed on the working group level.
