Don’t change a winning formula! 74

Morten Hansen

Don’t change a winning formula!

It will come as no surprise to readers of this blog that I strongly support the agreement with the IMF and EU. Why? Because it works! And because I see no other viable and credible alternative.

Here is just some of the recent evidence showing that it does indeed work (source: Bloomberg).

1. Latvia was on 1 September able to sell 12 mill. LVL of five-year bonds at an interest rate of just 5.691%, indicating regained credibility from financial markets.

2. RIGIBOR, the interbank rate, has fallen below 3% for the first time since 2005. Remember the almost 30% of June 2009? Seems ages ago now.

3. On 3 September FITCH, one of the rating agencies, changed its outlook on Latvia to ‘stable’ from ‘negative’ due to increased belief in the viability of economic stabilization.

4. The much-feared contagion effects were avoided, just check the praise from Lithuanian Prime Minister (24 September) Andrius Kubilius: “Latvia’s austerity measures during the peak of the financial crisis “saved” its Baltic neighbours”.

Tamper with the programme and it is back to quotes like the following (here just a few; there were tonnes of them):

“Latvia may devalue its currency any time as it just can’t afford to cut its budget further”. Nigel Rendell of RBC, 21 October 2009.

“At this point, a currency and financial crisis is pretty much unavoidable”. Nouriel Roubini (i.e. Dr. Doom himself) in the Financial Times, 10 June 2009.

Anyone in for a rerun of 2009? If not, stay the course. It’s as simple as that!

Morten Hansen
Head of Economics Department
Stockholm School of Economics in Riga

Komentāri (74)

Dzintars 25.10.2010. 11.18

Oops … !!!!!!

The quotes by Rendell and Roubini are of course from 2009….

No quotes like that this year – now it is the sound of silence instead!

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    idzenis > Dzintars 22.11.2010. 12.05

    I don’t regard this as being particularly positive: “Latvia was on 1 September able to sell 12 mill. LVL of five-year bonds at an interest rate of just 5.691%, indicating regained credibility from financial markets.”

    Doesn’t that mean we have just taken on more debt?

    Another interesting issue is where the loan is going. It took me a while to find some of the answers, but as of Feb, 2010 it appears that just 10% (0.41 billion) has gone to financing the state budget.

    Bearing this in mind, do you still advocate slashing public expenditure? I think you are overlooking the moral question of who is (and will be) paying for what, and that can only be properly discussed when we analyse where the loan money is going.

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Andis Cēsnieks 25.10.2010. 11.06

Ok, 2009, not 2010 – this make a difference! Let’s wait and see for new publications 🙂

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    gbergmanis > Andis Cēsnieks 27.10.2010. 23.51

    I am aware of this fact. However, trust me – people “out there” do not have time nor willingness to analyse those numbers extensively. In fact, they often do not see past the headline. If it says “Latvia did not meet the budget criteria” and then later in the text, or, even worse, an update for the article in like 4th or 5th paragraph says that in fact we have because of some accountancy mumbo-jumbo, no one will notice and no one will care. The message has been delivered already.

    Don’t forget December. There is always an interesting development on expenditure side (do you remember the former MoF O.Spurdzins who tried to limit the enormousness of this phenomenon and the subsequent failure?) . Also, although the current budget deficit development seems quite bright (comparatively) indeed, please do remember that it is based on cash-flow rather than on the EU methodology according to which we will be evaluated. Those two tend to be very different.

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    Una Grinberga > Andis Cēsnieks 25.10.2010. 17.02

    Just a comment: Latvia complied with IMF/EC program in 2009. Budget deficit according to Eusrostat methodology was over 10% indeed, but it included also increase of equity in Parex which is not really an expense as we can get back that money (probability not the highest, but still!). There is no doubts that 2010 targets will also be achieved – forecasted macro data seems to be better!

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    gbergmanis > Andis Cēsnieks 25.10.2010. 13.28

    I hardly think they will comment anything any time soon. The world seems to be heading towards a mess so deep (take Spain, Britain, the US, dollar/euro/yuan for a good start) that noone will notice Latvia even if we fail to comply with the IMF/EC program. Let alone take time to analyze trends, movements and develop a strategy proposal. An example – last week the CSB released that Latvia did not deliver the 10% deficit in 2009 it promised. Did you see any 1st page headlines or breaking news topics on this issue? If I may remind you, Reuters, Bloomberg, FT and others were full of troubling stories a year ago. All prominent media frequently even sent their reporters to Latvia to make cover stories, organize a full-page interviews. All of that is gone. Good! Lets keep it that way 🙂

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janisholsteins 25.10.2010. 16.21

Thanks, Morten!
But tell me, how to achieve growth of Y and reducing of Unemployment…. ?

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    baibabruvele > janisholsteins 20.12.2010. 16.31

    Hmm what about this – austerity produces stability and good ratings produced by likes of Fitch etc, this in turn attract investments and money, that we need to stimulate our economy and create employment and wealth. This is the plan of the goverment right now, I havent heared any other plans, so I suppose this is the only one. Well before the elections there were other plans, to sell everything we have and to spend on poor. I guess that still could be alternative.

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    Oskars Silārs > janisholsteins 25.10.2010. 17.08

    Do not overestimate the role of Y. I mean, it is the best measure, but it’s not universal. I.e. there was enormous growth in Y in 2006, but all it meant was that someone is borrowing large chunks of money and spends it in supermarkets. It was neither sustainable, nor a measure of wealth. Actually Latvians do not imagine how wealthy they are, and it goes beyond PPP, but that’s another story.

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    Dzintars > janisholsteins 25.10.2010. 16.43

    Well, if only that was also easy…..

    In short, the public sector must continue austerity, consumers are overleveraged and most likely careful with consumption due to risks of unemployment while firms have few reasons to invest at the moment.

    That leaves exports (which as a single driver is not much) and the (here) always-neglected supply side.

    Thus, again in short, the prospects for growth are far from rosy.

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