Devaluation talk is all hot air

  • 2007-11-07
  • By Mike Collier

TALLINN -- It seems it's Estonia's turn to be the country financial traders whisper about behind their hands.

Latvia and Lithuania regularly have to quash devaluation talk,but it comes as a surprise to find the Estonian kroon the subject of jittersgiven most analysts agree the economy is in better shape than the other BalticStates.

The latest rumourswere sparked by the coincidental release of several pieces of information thatwould probably be brushed aside if they hadn't been made public at the sametime.

First came aGoldman Sachs report giving a generally downbeat assessment of the Balticeconomies, which served as a background for every scrap of information thatfollowed.

On Friday Nov. 9,Franciszek Rozwadowsi, head of the IMF office in Estonia, told a press conference that theEstonian economy should be able to avoid a crash landing, as long as thegovernment manages to tighten its public spending commitments. Even though heexplicitly stated that there was no need to talk about devaluation, the merefact that he used the word seems to have been enough.

On the same day, Estonianfinancial daily Aripaev published a report drawing parallels between the stateof the Estonian economy today and the Swedish economy just before it devaluedthe krona in 1992. In both cases, extreme wage pressures, a property boom, agrowing current account deficit and a tightly-pegged currency were present. Thekrona was pegged to the ecu, forerunner of the euro to which the kroon ispegged by means of a currency board.

By Nov. 12,Finnish financial daily Kauppalehti had published its own take on the Aripaevarticle, adding further fuel to the wildfire of speculation, despite theabsence of anything but anecdotal evidence that speculators are gatheringaround the kroon. According to Kauppalehti "Currency trading is a sign thatinvestors expect the kroon to be devalued… the pressure for devaluation isgrowing."

Estonia's Finance Minister Ivari Padar admittedthat there are some similarities with pre-devaluation Sweden but that this was unimportant.

"I see no reason for a collapse. The Estonian kroon has been down severaltimes before and we have always come out on top. The kroon is efficient and Icannot see a reason for panic," said Padar.

Art Lestberg, head of currency markets at Hansabank Markets, took asimilarly sanguine view, saying that he has not noticed any unusualfluctuations in the currency markets.

"Customers are buyingand customers are selling. There is nothing extraordinary," he said.

 The most sensible assessment of all the devaluationtalk so far has come from maverick investor Kristjan Lepik. Writing in his blog, Lepik asked: "Why notcompare Estonia with pre-civil war Botswana? I am sure there are many similarities."