Latvians embrace an era of easy money

  • 2007-04-18
  • By Justin Wally

TAKE IT - IT'S YOURS! Banks and consumers are loving life in the low-interest zone, as consumers line up to borrow for cars and homes and financial institutions rake up record earnings.

RIGA - Choose Life. Choose a job. Choose a career. Choose a family. Choose a big television, choose washing machines, cars, compact disc players and electrical can openers. Choose good health, low cholesterol, and dental insurance… It's a monologue from the 1996 film "Trainspotting," but 11 years on it seems to be a fitting description of what is happening currently in Latvia 's consumption gone mad.

The latest economic indicators make for very worrying reading. Consumer lending went up by around 85 percent last year over a 12-month period, while after predicting that inflation would drop to 6.5 percent in April, the government has just announced that the retail price index is well in advance of this figure and has actually risen to a new 10-year high of 8.5 percent.
It would appear that the vicious inflationary circle is more akin to a swirling maelstrom. As prices go up employees go to their bosses and demand a pay increase. In many cases the boss in question dare not say "no" as he or she is aware that the current demand for efficient, competent employees far outstrips supply. Substantial pay raises are given which are then factored in to the company's costs and subsequently passed on to its customers.

Analysts such as Kelvin Hooke from Eurodeal Advisory Services are predicting that the government's recently adopted anti-inflation policy is a step in the right direction and should reduce aggregate lending because they impose stricter rules including a clear legislation on lending.
"The new rules will prevent many people from borrowing. Previously the whole system was open to abuse. The new plan, although far from perfect, is strategically the right step because the government does at least have a policy now, and this also suggests that there is some political will," Hooke said.

But the plan is in the embryonic stage. Hooke predicts that the new measures will need three to six months before their impact can be measured.
"This is because there is a time lag of several months between a policy being introduced and its subsequent effect," he said. "There are, after all, loans in the system that are historical and will slip through the net."
In 2006 Edmund Phelps won the Noble Prize for Economic Sciences for his theories on inflation, which included his theory that continual price rises are greatly influenced by consumer perception.
He apparently based many of his studies on the U.S. depression of the 1930s, but frankly 21st century Latvia would serve as a perfect example.

Latvians expect prices to go up and to continue doing so. They have totally lost sight of the fact that many food products and clothing items now cost considerably more in Latvia than they do in Germany, for example.
Ignorance is bliss for local merchants, who react to customers' price expectations by hiking prices, sometimes on a weekly basis. What other explanation is there for why Latvians are prepared to pay 650 lats (929 euros) for a camera that they could buy in Sweden for 30 percent less? A pair of brand-name sports trainers are snapped up for 80 lats in downtown Riga when an identical pair sit in a shop in Manchester going begging for 45 pounds (48 lats).

Easy money
Much of this spending boom can be attributed to Latvian consumers borrowing large amounts of cash on credit.
But just how easy is it to get your hands on cash for a house, car or even that state of the art tumble dryer you've been dreaming about?
Nordea employees told me that if I owned my own flat then I could get a loan worth 90 percent of the flat's market value. Upstairs in the Nordea Leasing department it was possible to get a 5-year lease on a car at an interest rate of around 5.5 - 7 percent.

Meanwhile, Parex Bank offered me a mortgage of up to 90 percent on a new project and 70 percent on an ageing Soviet era building. I was advised to take a 25-year mortgage, although a 50-year option was available. All I needed was a note from my employer and a declaration of my income to get the ball rolling on an 80,000 euro loan, which came in at 6.59 percent 's well below the latest inflation rate.

Just down the road at DnB Nord, I was offered eight-times the value of my salary to help me pay for a dream holiday to Outer Mongolia. Provided that my details checked out, there should be no problem in me qualifying for a loan; a loan that would require me paying back the bank at a rate of 10 's 17 percent. A 50,000 euro mortgage for an imaginary flat in Smiltene was mine provided that I earn more than 470 lats per month. My monthly repayment would work out at a moderate 290 euros per month, which almost prompted me to go ahead with my phantom mortgage plan.

It was clear from my walkabout that although the banks are certainly a bit stricter than they used to be about how much they are willing to lend its existing and potential customers, if you have a regular job and earn more than 70 lats a week then getting your hands on some cash is no problem at all in Riga.

The only saving grace seems to be that the new government strategy will, when it eventually fully kicks in, deter some consumers from borrowing more money and help to diminish their appetite for buying everything and anything.