RIGA - Rising corporate debt levels in Latvia have hit businesses and individuals hard as the economy continues its downward spiral and it becomes more and more difficult for many to pay back their loans.
The situation has caused a chain reaction for individuals who are in turn suffering as a result of lost work hours and unpaid wages.
Loans with overdue payments reached 15 percent of the Latvian bank loan portfolio at the end of last year, growing 8.2 percentage points from late 2007, reported the Finance and Capital Market Commission (FKTK) financial watchdog.
As a result of escalating debt levels, many businesses and banks are turning to debt collection agencies in a bid to recoup losses.
The number of corporate debtors has grown sharply since the fall of 2008 and looks set to rise further as Latvia struggles to emerge from a massive economic slump.
Marcis Katajs, board member of Latvia's Paus Konsults debt collection company 's which counts Swedbank, SEB Banka, as well as mobile operators Tele2 and LMT and cosmetics retailer Oriflame Latvija among its biggest clients 's said levels of unsettled debts had increased across all sectors, with real estate and service industries the hardest hit.
Last year in Latvia the number of corporate debtors rose steeper by percentage rate, while the number of individual debtors increased numerically.
"It can be explained with the situation in the country. When business was developing rapidly, the unchanged segment of debtors were individuals 's people who borrowed [without] considering when they are able to return their loans," said Katajs.
"As soon as problems occurred in the business environment, there were insolvency problems for companies who were only able to function when life was moving upward, such as in the real estate and service sectors," he said.
Katajs said difficulties in refinancing, mortgaging and on-selling properties were behind growing levels of unsustainable debt in corporate spheres.
Of the total 8.18 billion lats (11.64 billion euros) in loans issued to various branches of the economy, 14.9 percent were overdue at the end of last year.
The mining and quarrying industries recorded the largest proportion of overdue loans at the end of 2008 at 29.4 percent, followed by the real estate sector at 25 percent, hotel and restaurant businesses at 23.7 percent and health and social care at 23.5 percent.
Latvia's construction industry, processing industry, agriculture, forestry and fisheries, commerce, education, transport, warehousing and communications sectors also struggled with overdue loan payments, according to FKTK figures.
With rising unemployment levels and salary cuts, Latvia's households are also feeling the pinch.
FKTK data shows of the total 6.38 billion lats in bank loans issued to households in Latvia 17.6 percent were in arrears by the end of 2008, 8.1 percentage points higher than 2007.
Furthermore, 16.7 percent of bank loans extended to households in 2008 for buying, renovating and repairing homes were overdue by year's end, an increase of 7.3 percentage points over 2007, when the figure was at 9.4 percent.
Meanwhile, overdue loans granted for consumer goods rose to 14.9 percent, up from 8.9 percent a year ago.
Maruta Broka, marketing specialist for Creditreform Latvija, said unpaid public utilities and higher purchase costs for household goods were major drivers behind the rapid growth of debt in the non-banking sector.
The lending information and debt collection company, which has 172 offices Europe-wide, last year collected 185,000 debts, totaling 60 million lats.
In the same year the company recorded a 67 percent increase in corporate debt, while individual debts grew by 51 percent.
Broka said the company now had more than 450,000 debtors registered on its database.
A breakdown of FKTK figures also reveals a growing upward trend in Latvia's debt levels.
The financial regulator has reported that loans with payments overdue less than 30 days totaled 1.192 billion lats in 2008, a growth by 63.6 percent from the end of 2007. Loans with payments overdue by 31-90 reached 697.476 million lats, or four times more than at the end of 2007. Loans with payments overdue by 91-180 days totaled 249.969 million lats, or 4.4 times more than in late 2007.
Meanwhile, loans with payments overdue by more than 180 days added up to 348.36 million lats, or 6.3 times more than at the end of 2007.
Spiraling debt levels have come at an enormous social cost, advocacy groups say, with increases in depression, suicide rates and alcohol abuse being reported.
Welfare groups speak of a growing social crisis as economic hardships increase pressures on families and communities, particularly in Latvia's vulnerable rural areas.
The fallout from the global credit crunch has had enormous political and economic impact throughout Europe, including Latvia.
Influential international consultancy Aon has warned political and economic risks were on the rise in the Baltic states due to the region's worsening financial problems.
Miles Jonston, head of the Aon political risks department, said countries such as Latvia had been financing fast economic growth with massive bank loans. The abrupt slowdown in financing and lending had rendered many loans unsustainable, Jonston said, which is now fuelling growing economic risks and political upheaval.
He pointed to the rise in protests and street disturbances in the Baltic states and in other European nations such as Iceland and Greece.
The streets of Riga erupted in violence following a peaceful demonstration on Jan. 13 calling for the government to stand down over its handling of the financial crisis.
Protesters stormed Parliament and destroyed property, including several police vehicles, in the worst outpouring of violence since independence.
There are growing calls in Latvia for the government to use the 7 billion euro rescue package it received from international lenders to ease the debt burdens and revive Latvia's struggling business sectors.
"The credit crunch is turning from an economical into a political problem. When there is an economic slowdown, governments are left with fewer resources for solving problems, which in turn can cause political instability," said Jonston.
Of the total loans to various branches of the economy, 14.9 percent were overdue at the end of 2008.
Mining and quarrying industries accumulated the largest proportion of overdue loans at the end of 2008 at 29.4 percent.
The real estate sector accounted for 25 percent in overdue loan payments, followed by the hotel and restaurant business at 23.7 percent and health and social care at 23.5 percent.
The total amount of the loans at the end of 2008 was 8.18 billion lats (11.64 billion euros), including 6.96 billion lats without overdue payments.
Of the bank loans issued to households in Latvia 17.6 percent were in arrears at the end of 2008, which is 8.1 percentage points more than in late 2007.
By the end of last year, 16.7 percent of bank loans that had been extended to households were overdue at the end of last year, up from 9.4 percent in 2007.
At the end of 2008 total loans with payments overdue less than 30 days made up 1.19 billion lats, a growth of 63.6 percent from the end of 2007.
Loans with payments overdue for 31-90 days totalled 697.48 million lats, or four times more than at the end of 2007.
Loans with payments overdue for 91-180 days totalled 249.97 million lats, or 4.4 times more than in late 2007.
Loans with payments overdue by more than 180 days added up to 348.36 million lats, or 6.3 times more than at the end of 2007.
At the end of 2008, standard loans accounted for 15.74 billion lats, growing 6.3 percent year-on-year.
Watchlist loans made up 500.98 million lats, rising 7.9 times. Sub-standard loans totalled 273.33 million lats, or 8.8 times more than at the end of 2007. Doubtful loans stood at 61.03 million lats, growing 7.1 times, and lost loans accounted for 29.67 million lats at an 84.1 percent growth.
* Figures from Latvia's Finance and Capital Market Commission (FKTK)