Latvia succeeds with latest debt offer

RIGA - On April 7, Latvian government securities worth 5.25 million lats (7.4 million euros) were sold at competitive bids in a multi-price auction, reports the Latvian Institute. Government securities maturing on Oct. 8, 2010 - six month notes - with an average weighted interest rate of 1.795 percent, were sold in the amount of 1.25 million lats (1.78 million euros). Two bidders demanded 6.25 million lats’ worth of these securities, while the amount offered by the State Treasury at the auction was 4 million lats.

Government securities maturing on April 8, 2011 - one year bonds - with an average weighted rate of 3.385 percent, were sold in the amount of 4 million lats. Five bidders demanded 11.6 million lats’  worth of these securities, while the supply was 4 million lats.

Considering the positive reception, Central Bank Governor Ilmars Rimsevics said on April 17 that Latvia may attempt to sell bonds abroad at the end of the year, which would be the first such sale since February 2008, reports Bloomberg. “Sooner or later, we are striving for replacing all the aid money with money borrowed in international markets,” Rimsevics said.

“Latvia has plenty of money now, there is no need to borrow. The best time to tap the market would be after the acceptance of the budget for 2011, when the rest of the world sees Latvia is strong and continuing the fiscal consolidation, and premiums will be even lower.”

Latvia turned to a group led by the European Commission and the International Monetary Fund for a loan after it took over its second-biggest bank, Parex, as the bank collapsed. Latvia pushed through wage cuts and tax increases equal to about 10 percent of GDP to make the economy more competitive and cut the budget deficit.
“We clearly see that the program works,” Rimsevics said. “Latvia is regaining competitiveness. Salaries are down, productivity is up and our exports are growing.”

The yield on Latvia’s 5.5 percent government bond, due March 2018, dropped 11 basis points (0.11 percent) on April 16, to 5.46 percent. That compares with a yield as high as close to 12 percent in March 2009. Latvia’s 5-year credit default swap fell to 319 basis points, compared with a high of about 1,200 basis points last March.

The country is slashing pay and using deflation to restore competitiveness lost during its economic boom while maintaining its fixed exchange rate to the euro. The economy contracted about 18 percent last year, after a 5 percent decline in 2008, after a real-estate-fueled boom turned bust, credit tightened and consumer spending collapsed.
Latvia’s exports reached their pre-crisis level in the first quarter of this year, Rimsevics said. The country will probably return to growth in the third or the fourth quarter of 2010. The economy will probably expand between 3 percent and 3.5 percent next year, after this year’s contraction.