Greece told to copy Baltics

RIGA - The Latvian model for fiscal austerity, put in place due to the collapse of the economy and Parex bank and the resulting impact on the budget, is being touted as the appropriate rescue plan for Greece as its government faces mounting budget deficits and imminent bankruptcy. Greece must deploy budget cuts on the same scale as the Baltics to survive its debt crisis and sacrifice economic growth to restore fiscal health, said Latvia’s central bank governor and Lithuani’s finance minister, reports Bloomberg.

The Baltic States, whose fixed exchange rates last year forced them to execute the European Union’s toughest austerity packages to protect their finances, suffered the 27-member bloc’s deepest recessions. Latvia’s economic output dropped an annual 19 percent in the third quarter; Lithuania’s contracted 19.5 percent the previous quarter, while Estonian output dropped 16.1 percent in the same period. All three had their ratings outlooks raised last month at Moody’s Investors Service.

Greece has turned to its fellow EU members and the IMF for help through the activation of a 45 billion-euro emergency loan package as the government struggles to meet soaring debt costs. The yield on Greek two-year bonds is above 18 percent, more than triple the rate on Latvia’s 2014 note. Latvia cut public spending by 10 percent of GDP last year as it continues to receive assistance through a 7.5 billion-euro EU and IMF-led loan agreement.

“The Greek situation is similar to Latvia’s in that there is no other choice but to downsize expenditures,” Latvian central bank Governor Ilmars Rimsevics said. “We are very pleased that Latvia is more and more mentioned as a template because a year ago people were thinking we were going to fail. Today, things are more or less out of the woods.”
Greece is more likely to default than any of the EU’s emerging members, credit default swaps show. The cost of insuring against Greek default is near all-time highs as Greek 10-year bond yields rose to the highest rate since at least 1998. After Greece’s announcement of the rescue request, the 2-year yield declined 82 basis points (0.82 percent) to 9.481 percent. The yield premium on 10-year Greek bonds over bunds narrowed to 500 basis points from 590 basis points.
Latvia’s 5-year credit default swaps are around 325 basis points, compared with a high of about 1,200 basis points in March 2009. Five-year Lithuanian CDS are around 215 basis points.

Even after spending cuts, Latvia’s deficit widened to 9 percent of GDP last year, as the economy shrank 18 percent. The government has pledged more spending cuts in the next two years to comply with the euro-adoption limit of 3 percent. Prime Minister Valdis Dombrovskis’ (New Era) government targets the currency switch for 2014.
Lithuanian Prime Minister Andrius Kubilius’ measures helped cap the public deficit at 8.9 percent of GDP, without having to resort to a bailout. Without wage cuts, tax increases and other spending cuts, the deficit might have swelled to 17.5 percent, he said on April 15.

“If a country can’t raise money at favorable terms to finance the deficit, the country must reduce the deficit; this is something we know a lot about,” said Finance Minister Ingrida Simonyte. “Baltic countries had to clean up their houses very quickly in order to get back on track,” while “Greece was able to raise money in international markets last year at rates I would envy.”

Even so, Prime Minister George Papandreou’s government, faced with street protests and strikes against budget cuts, has failed to convince investors Greece can shore up its debt. The Greek government can’t afford to delay austerity measures, Rimsevics said.
Swedish central bank Governor Stefan Ingves, who said that Greece’s bailout may follow the path set out by Latvia, added that while the EU and IMF would be involved in the financing, “in the end the country itself will have to deal with its fiscal problems.”

“It should be a Greek program; the Greeks should be designing, constructing and communicating it,” said Rimsevics. “The key question is the speed and the clarity of the measures and that the market believes in these measures. The more dragged out in time, the less effective they are.”
The Greek example also shows that the euro isn’t the safe haven it was once perceived to be by the EU’s emerging members. “The countries can learn that the euro is not a solution; it’s always the fiscal policy, the home policies that are the solution,” Simonyte said. “You can’t spend a lot of money and hope there will be somebody who will clean up your unsustainable deficit.”