Latvia and debt sustainability

Financial markets takes into account also private sector debt, inflation, exports, dependence on exports or imports, unemployment and skills of workers, demographics and … sentiment.

Smoke On The East European Horizon?
http://www.economonitor.com/edwardhugh/2011/07/10/smoke-on-the-east-european-horizon/

Postponement of repayment or devaluation seems risky, from this point of view.

P.S.
Ko taupa taupītājs, to paņem laupītājs. Ne jau vārdu “taupība” mūsu ministram vajadzēja atcerēties, bet “pieticība”.

Saskaņas Centra ekonomiskā programma šķiet Latvijas ienaidnieku rakstīta. Viņi piedāvāja 2011. gadam budžeta deficītu 12 procentus. Nepateica no kā aizņemsies, jādomā ka plānoja kā Ukraina – dabūt naudu no Krievijas apmaiņā pret krievu karabāzēm savā teritorijā.

Tāpēc šībrīža piedāvājums – palielināt pensijas, lai gan Sociālā fonda izdevumi ir par 20% lielāki kā ienākumi; ‘uzmest’ aizdevējus, lai pieaugtu kredītprocenti, utml. ir loģisks piedāvājums, lai sagrautu budžetu.

The government debt is increasing but still acceptable when comparing with other countries. SC proposal partially default on it is not shared by political mainstream.

Would the author comment on situation with private debt, mainly owed by households? IMF analysed that in 2004-08 households in Latvia went from not having any debt to being highly indebted by international standards. Servicing of foreign financed private debt also will be a drag on any future growth.

Taking the Fischer effect as a reference, would the following formula not be somewhat more exact? dD = D x [(1+i)/(1+p)(1+y) – 1] – bb ?

The whole beggar philosophy of “ask for a postponement” reminds me a bit of Kencis from “Mernieku laiki” (highly recommended literature).

Fortunately, there is no such thing as “postponement”. And there is no such thing as “negotiating lower interest rates”. The IMF has various instruments and those are rules-based. Of course, with time, one may qualify for a different instrument with much more favorable terms but then we have to become much poorer. For example, many poor African countries got a debt relief not so long ago, and also, they usually get highly concessional interest rates. And the poorer the country, the more concessional the rates are. But we probably need a couple of decades of uninterrupted and strong commitment to the current policies to qualify for those “goods”. So, see the upside of the current policies! Of course, an alternative is to default “just because we want to” and join the respectable group of Latin American and African countries who default every now and then. Estonians, I think, would make a huge celebration at that point. At last their long-held dream of decoupling from what they perceive “corrupt southern neighbors” would come through (the euro introduction was only a partial success in this regard: while they got headlines like “Estonian exceptionalism” in “the Economist”, those articles still mentioned the shabby L-countries).

To some previous comments: well, if we assume zero growth and inflation, no debt level is sustainable, even 1%… It does not make sense to become hysterical on those horror scenarios. We are still a poor country converging and a lot of advanced countries with lousy demographics will fall before we do. And that will probably mean a paradigm change. So, don’t you worry.

The formulas illustrate 2 simple truths, which are in fact easily recognizable even without any math.
1) inflation is good for the debtor, if interest rate is fixed. It is the most trivial truth, good luck, if the creditor has been stupid enough to lend below the inflation rate ( I guess a secret hope of many private credit takers, based on the experience of 1990 and years before ).

2) Relative size of the debt decreases if debtor becomes wealthier (growing GDP). A simple truth again. However, if demographics goes sharply down, like in Latvia, it is close to impossible to have an increasing GDP (in sustainable terms, not by one-time actions like selling off “family silver”, ahem, privatizations or by taking affectionate care of our forests by chain saw) .

In other words: if our children would be more numerous than we are now, it would be not a big problem to repay the debts of their few parents. If they are fewer than we, the creditors will push us to accept mass immigration – the more the better. Hence a conclusion, valid for any small country with poor demographics: if you want to sustain some national identity at all in the future, do not make debts, even the so called “sustainable debts”.

When one sees a cheap debt available and thinks he can do better than the debt interest rates, it is very natural to wish to postpone the payment, without considering the side effects. If that would somehow directly contribute to the overall country productivity, that could be even something to consider. But that if is a big one.