RIGA - The economic crisis now enveloping the Baltic countries can be blamed in good part on the governments for not having paid attention soon enough to the macroeconomic imbalances building throughout the economies, says former Bank of Sweden Governor Bengt Dennis.
Speaking in Stockholm on Oct. 16, Dennis said that "As the Baltic countries are ruled by weak coalition governments, politicians have not wanted to take necessary but uncomfortable decisions, even when success made them giddy. And the more unstable the situation the less likely it is to expect such decisions."
"I forecast that the GDP of Estonia and Latvia, and perhaps also of Lithuania, will decline in the next few years," he said, and expects that the crisis in the Baltic countries will deliver a heavy blow to Swedbank and SEB, whose losses will grow substantially. These banks have been on a lending spree in the region with extended loans now at, respectively 190 billion (19 billion euros) and 145 billion Swedish kronor.
The crisis shows that governments did not interfere in good time, that the Baltic countries are still relatively poor countries and the crisis will hit the unemployed, the sick and the pensioners hardest, says Dennis, as reported in Swedish daily Dagens Industri.
Latvia is third highest among emerging markets for financial risk, and only the economies of Kazakhstan and Iceland are more vulnerable, claims the financial risk rating scheme developed by RBC Capital Markets investment bank, owned by Royal Bank of Canada.
The rating system was developed to identify countries with increasing risk of bank and currency crises. The index measures the current account balance, growth and stock of private sector credit, the amount of short-term external debt, banking system capital adequacy and the level of overheated economies.
Estonia and Lithuania ranked 7th and 8th, respectively.
The researchers concluded that the risk level in several emerging economies like Hungary, Romania, Latvia, Lithuania and Estonia is high, as these countries have insufficient liquidity to support their financial sectors in a manner similar to what the U.S. and Western Europe have done.
"In the present environment most parent banks are likely to be more concerned about conditions in their home market and therefore have limited capacity to provide any sizeable liquidity boosts overseas. In this respect, the (overvalued) pegged foreign exchange systems in the Baltic states, where Swedish banks have a large presence, add a further element of risk," believe RBC Capital Markets analysts.
Investors are currently taking a wait-and-see position towards Latvia, says Bank of Latvia Governor Ilmars Rimsevics. "I do not think that they are leaving the country in haste. It would be odd, as nothing dramatic has happened in Latvia yet. I would like to stress the crucial importance of decisions, currently under preparation, for next year's budget," said Rimsevics.
He added that investors were constantly comparing Latvia to other countries. "Estonia's example is very demonstrative. Estonians too have a public sector, they have to raise expenditure, but the pragmatism with which the Estonians have been working for the past five years, balancing their budget each year, is a good example. We could have been in the same position. Why can the Estonians balance their budget and we can not?" he asks.
He noted that Lithuania, which has been living with a budget deficit during this time, is in a different situation, as economic growth started later, though they, too, are set to take drastic measures aimed at balancing their budget.
Swedbank Latvia's chief social economic expert Peteris Strautins says comparisons between the Latvian and Icelandic economies are unfounded, and that Latvia will not meet the same fate as Iceland.
He said that the Latvian banking sectors serve mainly the financial needs of Latvia's economy, while Icelandic banks went far beyond banking services for their own economy, and were not able to tolerate shocks to the world's financial systems due to their extreme leveraging.
The bulk of Latvia's banking sector is owned by western European banks, with parent operations that are much larger than their Baltic subsidiaries and can provide support and liquidity if necessary. "As our banking sector within our economy is much smaller, it means that the banks can also be supported by the government, if needed, which cannot be done by Iceland's government," Strautins said.
He says that Latvia's high balance of payments deficit, similar to that of Iceland's, means: "both in Latvia and Iceland consumers will have to curb buying imported goods, as such a deficit cannot be reduced rapidly, and expect to keep up the previous lifestyle. This process is taking place in Iceland by the currency exchange rate dropping, while in Latvia personal income in lats will have to drop, though the rate of the lat against the euro will remain unchanged."