RIGA - 2008 will probably go down in Baltic history as the "year of the great economic fall," or to the chagrin of central bankers and politicians, as the "year of the hard landing." Exactly which is a matter of semantic preference.
Regardless, for many consumers and businesses the year will forever be synonymous with debt collection.
After four straight years of borrowing money and buying on credit, often without any regard for long-term consequences, thousands of Latvians are suddenly finding it impossible to make their monthly payments. Many are hiding in the vain hope that the debts will vanish.
But a few firms specializing in collecting debt, who for years seemed to occupy the loneliest market niche, are working overtime to ensure that consumers pay up 's and in full.
And their business is booming. Maris Baidekalns, a board member at Creditreform, said from January to April the number of delayed debt cases increased 44 percent compared with the same four months last year.
Marcis Katajs, director of Paus Konsults, a debt collection firm, said Latvian banks submitted 6,556 debt cases, up 45 percent from February. He said the data base Risk.lv, which encompasses the broadest body of information on Latvia's debtors, now includes a staggering 200,000 debt cases.
There is, of course, an ironic element of inevitability in the situation. First, many Latvians simply suffered from a post-EU accession euphoria and rushed to borrow in an effort to improve their standard of living 's irrespective of the long-term implications.
Here the real estate bonanza is partially to blame, since a rapid appreciation in property prices 's many properties saw their value triple in three years 's allowed consumers to return to banks and borrow more, exactly what happened in the United States.
Second, Latvia's banks were lackadaisical and often doled out money without conducting the necessary risk analysis.
It was only this year, in fact, that the country's 23 banks finally introduced a common data base of all borrowers. Previously, they had no way of knowing which of their customers had borrowed from other financial institutions, said Katajs.
This major loophole allowed credit-hungry Latvians to bunny-hop among several banks, borrowing funds and acquiring credit cards from each. According to Katajs, many Latvians who moved abroad to work did this in order to pay for their travel and living expenses.
Third, consumers are being stung by rampant inflation, which has nearly reached 18 percent in Latvia. Food and utility prices are increasing even faster, eating up an ever larger portion of household income.
Thanks to awful macroeconomic governance, Latvians are having to spend more of their income on life's daily necessities.
In the end, Latvians borrowed too much, too quickly. If total lending to households totaled 761 million lats (1 billion euros) at the end of 2003, then four years later it was 6 billion lats, according to Bank of Latvia data.
Overall bank lending by the end of 2007 amounted to 93 percent of GDP, which is more than many West European countries. By comparison, the equivalent indicator in Lithuania was 76 percent in December.
According to Creditreform, the average size of a delayed debt case is 745 lats, and usually it is owed for consumer credit, telecommunication services, and utility payments.
Katajs said that of the 200,000 debt cases in the data base, there are approximately 150,000 different individuals and legal entities. He said roughly 30 percent of those in the data base have more than one debt.
As expected, debtors are behaving differently. Some are trying hard to work out arrangements with their creditor, while others try to ignore the letters and phone calls.
Katajs said that, in the long run, unscrupulous debtors will ultimately suffer since they will be blacklisted and thus never able to borrow a santim.
Looking to the months ahead, the situation will only get worse. Katajs expects the number of new debt cases to peak in October.
In the words of Creditreform's Baidekalns, "This year the economic deceleration is intensifying, and more enterprises are encountering serious difficulties that threaten their activities. In this situation the growth of delayed payment cases and debt can only increase."
Still, Baidekalns cautions against overdramatizing the situation.
The Capital Markets and Finance Commission said that non-performing loans accounted for only 0.5 percent of all loans at the end of March, up slightly from 0.4 percent in December. The number of watchlist loans, however, increased from 0.4 percent to 0.7 percent over the same period.
