Baltic regional analysis – post insolvency

The Globe and Mail is reporting on the outlook for the Baltics.

Latvia and other Baltic countries received bailouts from the IMF when their public institutions became insolvent during the credit crunch in 2008-2009. Latvia suffered a dramatic 24% shrinkage of its economy over the crisis (which, the Globe & Mail notes, is greater than that of crisis of the U.S. during the Great Depression).

Some of these Baltic countries peg their currency (and some of their debts) to the Euro. Some economists argued that rather than a bailout the countries should have revalued their currencies. The article notes:

“It makes no sense to continue to shrink the Latvian economy, with no end in sight to the recession, simply to maintain the pegged exchange rate,” agreed [Mark] Weisbrot. “Argentina tried this from 1998-2002, also suffering its worst recession ever and pushing 42 per cent of its households into poverty.”

The Baltic governments and central banks argued devaluation – which would be a ‘nuclear’ option for faltering euro zone members – would cause more harm than good, due mainly to high levels of debt in euros run up during the boom.

As a result, Latvia is set to see a 2009 fall in economic activity of 18 per cent and Estonia around 14 per cent. Lithuania has reported a drop of 15 per cent.

The article talks about some of the effects of the austerity:

But by and large you don’t see the poverty in the Baltic capitals, where the streets still buzz with activity, and popular cafes and restaurants are often full.

It’s the suburbs that can show most how property and construction, shops, restaurants and car dealers have been really hit.

At the Saliena property project just outside Riga, sales director Barny Edis points to empty, unsold houses. The ground is still muddy; pipes and construction material have been left lying around. Evidence of the past boom is down the road, where 200 houses that did sell are still occupied.

“It is tough. It’s been tough for me, it’s been tough for my family, but what doesn’t kill you makes you stronger,” said Mr. Edis, a Briton who brought his wife and two children to Latvia in 2007, just before the property bubble burst.

One pithy quote: “The crisis could be felt in many spheres, he said: People had to realize that to find a job they had to bring down their expectations of how much they could earn.”

The effects of a sovereign insolvency, such as those described above, are important to considering how to mitigate the immediate, short-term and long-term harm of the crisis.

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