Author Archives: Edward Hugh

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

Germany’s Economy Returns To (Timid) Growth In Q2

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The German economy, Europe’s largest, unexpectedly returned to growth in the second quarter, technically bringing an end to its worst recession since World War II. The euro climbed 0.2 percent to $1.4248 on release of the report.

But don’t get carried away just yet, since while gross domestic product rose a seasonally adjusted 0.3 percent from the first quarter, when it plunged 3.5 percent, the most since quarterly data were first compiled in 1970, compared with Q1 2008 Compared with the second quarter of 2008, the price-adjusted GDP product was down 7.1%, while after adjustment for calendar variations, economic performance decreased 5.9% on a year earlier as the quarter had three working days less than the same period of the previous year.

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“Advances in Development Reverse Fertility Declines” – Science or Hocus Pocus?

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According to a once-upon-a-time post on the Economist’s Certain Ideas of Europe Blog Edward Hugh “was very cross” about some of the journalism they were serving up over at that prestigious journal. Well, not to worry, since this time he is hopping mad. And the issue which lies behind his wrath is essentially the same one, how to interpret and understand the demographic processes which are currently so evidently affecting our societies. In what is simply the latest episode in a long and sorry saga (if you want documentation, please see the comments Claus Vistesen and I nailed to their “Wall” in the above linked post) this week’s print issue contains a research review from their science and technology correspondent who is evidently not backward in coming forward with headline grabbing claims. According to the said corresponedent the demographic transition (a process which has been ongoing for over two hundred years now) has finally and definitively gone into reverse gear:

“One of the paradoxes of human biology is that the rich world has fewer children than the poor world. In most species, improved circumstances are expected to increase reproductive effort, not reduce it, yet as economic development gets going, country after country has experienced what is known as the demographic transition: fertility (defined as the number of children borne by a woman over her lifetime) drops from around eight to near one and a half. That number is so small that even with the reduced child mortality which usually accompanies development it cannot possibly sustain the population.

If Mikko Myrskyla of the University of Pennsylvania and his colleagues are correct, though, things might not be quite as bad as that. A study they have just published in Nature suggests that as development continues, the demographic transition goes into reverse.”

Well quite a strong claim is being made here. The idea that a group of researchers have come up with a finding that shows the “rule….that people have fewer children as their countries get richer…no longer holds true” is certainly not one to be sniffed at. Such a strong claim needs some very heavy backing you would think, given all the research that has gone into the topic in recent years.

In fact, the research makes no such direct claim, since Myrskylä et al simply find statistically significant evidence for a reversal in the relationship between the human development index (HDI)
and the total fertility rate (Tfr) at HDI levels around 0.85–0.9. The rest is only interpretation. As we will see, to move from a simple statististical correlation to formulating a hypothesis you need an explanatory framework, and you need to be able to make falsifiable predictions. The Nature letter from Myrskylä et al is far from being at this stage of development. They have simply found an interesting correlation, and the rest is in the eye of the observer.

“Back in 1975, a graph plotting fertility rate against the Human Development Index fell as the Human Development Index rose. By 2005, though, the line had a kink in it. Above an HDI of 0.9 or so, it turned up, producing what is known in the jargon as a “J-shaped” curve (even though it is the mirror image of a letter J). As the chart shows, in many countries with really high levels of development (around 0.95) fertility rates are now approaching two children per woman. There are exceptions, notably Canada and Japan, but the trend is clear.”

However, according to the Economist the trend is clear. But is it? Edward has been doing some digging. Continue reading →

Is It Hot In Latvia In August?

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Well the big news this morning is that the IMF mission to Latvia has finally reached agreement with the Latvian government on a new policy package that will give the country access to about $278 million in new financing. Details of the deal are scant at the moment, since the Letter of Intent will not be published until the IMF board approves the agreement, but it seems the terms of the IMF deal are (on the face of it) tough: additional budget cuts worth a reported 500 million lats ($1.02 billion) for 2010, a progressive income tax with the possibility of an increase in VAT if the cuts do not reduce the budget deficit to the stipulated level.

Really, this agreement changes very little in my opinion. As Capital Economics’ Neil Shearing points out, many people are assuming that with the rapid Current Account adjustment in many CEE countries, the threat to external financial stability has largely gone away. But as Neil argues, while theoretically, it should be enough for the countries just to move back to balance, practical experience from Argentina etc suggests that as recovery arrives the CA tends to move from large deficit to large surplus. And this of course means exports growing at a much faster rate than imports. This is the only practical way to pay down the debt.

And as Afoe’s own Claus Vistesen puts it:

This is all about the composition of the external balance and what kind of extensions foreign creditors give. Now, the benefit of the peg is of course that you can begin to accumulate foreign assets at reasonable valuation to your liabilities. HOWEVER, the only way to reasonably begin this process is of course to actually begin accumulating those assets and in order to so so, you need productive investment targeted at foreign operations and this is very difficult unless the “internal devaluation” has run its course. Essentially, domestic investment to serve foreign markets are not productive until deflation has taken its toll.

So basically the message is, whatever the final details of the new agreement, stay tuned and keep watching, since all of this is far from over.

Edward Will Not Be Going To Latvia In August

The little news of the day is that I will not be attending the conference on Latvia’s economic future which members of the Peoples Party are trying to organise for August, even though I was invited. As the Latvia Daily Diena (Latvian only I’m afraid) which reports on the preparations for the conference puts it “E. Hugh, who declared himself a defender of the lat devaluation, however, declined to participate, adding he’d like to maintain political neutrality.” Well, this is fair enough as a presentation of my opinion, but, just for the record, here’s what I actually did say.

First of all I would like to say thank you very much for thinking of me and inviting me to your conference….

….while I think a decision to accept the original IMF proposal of a 15% devaluation of the Lat, and pressure the EU Commission into euro entry was the best option last autumn, this is now no longer the situation. So while I was advocating devaluation back then, what I am saying now is that in my opinion devaluation is inevitable at some point, but that it will now be an unholy mess. Serious contagion problems will most likely ensue, and so in this sense I am no longer “advocating” Latvian devaluation. Ideally it needs to take place as part of a much more general solution to problems in the economies of the Eastern European countries who are members of the EU.

If Latvia is simply forced off the peg, then we should all watch out. I am in Spain, and I am expecting consequences here.

Thirdly, I am not in basic disagreement with the IMF, and would not wish to do anything which may make their work more difficult. Basically, from where I am sitting the issue is to put pressure on the EU institutional structure in an attempt to get them to recognise some of the basic ABCs of economics.

Lastly, I would emphasise that I am an economist, a mere technician of economic systems, and not a politician. I am explicitly non politicial, and am maintaining this stance both vigourously and adamantly.

Basically, as I said, I consider devaluation inevitable….. tomorrow, in August, after Christmas, in 2011, I don’t know when. I also know that the longer it is in coming, the more serious the consequences will be, due to the continuous degradation in the credibility of the associated institutions (IMF, ECB, EU Commission, EBRD etc). This is all now quite likely to eventually become (via the other Baltic states, Bulgaria, Hungary, Romania and even Ukraine and Serbia) a very serious problem, with potentially major global implications.

So there will be a before and after. After devaluation there will need to be a major rethink about where Latvia is going. Devaluation is not an end in itself, it is simply a means to an end, a begininning. We also need to think about how Latvia will earn its living, pay off its debts, and find its way in the world.

Long term structural, and strategic economic thinking are needed.

Here I think I do have a part to play. As you may well have noticed, my view is that the ongoing demographic deterioration of your country lies at the heart of your macro economic problems.

I think this deterioration needs to be addressed as soon as possible, and I see three large issue.

i) Productive capacity needs to be increased substantially. This means increasing the labour force, and this means (as outlined in the World Bank Report, From Red To Grey) facilitating large scale inward migration. Given the serious political implications of encouraging ethnic Russian migration into your country, I see only two viable source regions, the Central Asian Republics in the CIS, and Sub. Saharan Africa. Possibly this solution will not be widely popular with Latvian voters. Well, they do have the right to choose. Your country can take the measures needed to become sustainable, or you can watch it die, as the economy shrinks, and the young people leave. That, I think, is your choice.

The other two measures you need to take are contingent on the first being implemented, since without the first measure you will simply not dispose of the economic resources for the other two.

ii) A serious policy to support those Latvian women who do wish to have children. But with major financial advantages, not half measures, and propaganda stunts. You need policies that can work, and I know plenty of demographers with ideas.But this needs money. Important quantities of money. And gender empowerment, right across the economy, at every level. We have formal legal equality in the labour market, but evident biological and reproductive inequality, in that only one of the parties gets to bear the children. The institutional resources of the state need to redress this imbalance.

iii) Major reforms in the health system to address the underlying male life expectancy problem. You can only seriously hope to raise the labour force participation rates at 65 and over if people arrive at these ages in a fundamentally healthy condition. In economic terms, simple investment theory shows why this is the case. A given society spends a given quantity of resources on producing a given number of children, those who have citizens who live and work longer evidently get a better return on their investment. If you want to raise Latvian living standards, you have to raise the life expectancy. And this apart from the evident human issues.

OK, I am saying no for the moment, but I would like to stress that when conditions change, I would be more than willing to come to your country to try to help. But not for a day, for a month, and not to give a talk, but to work with some serious people who are willing to roll their sleeves up and do the serious spadework that will be needed to find those solutions you so badly need.

Basically, my feeling is that the issues you face are so complex that public debate is unlikely to produce a very fruitful outcome at this point. You need a long term education process, and for the time being more or less technocratic solutions, but not the technocratic solutions you are being offered by the EU now (which basically won’t work), technocratic solutions which get to the heart of the problem and set your country on a sustainable path.

It Isn’t Only Canicular Heat They Are Suffering From In Latvia

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Maintaining the peg also requires substantial political commitment. If this commitment were to falter, there is a risk that the execution of the difficult but necessary policies required under the authorities’ program could also weaken. However, all political parties are strongly committed to the exchange rate peg.

How the world changes in six months. The above lines come from the IMF “Republic of Latvia: Request for Stand-By Arrangement – Staff Report” of January 9 2009. But just today we can read in a Baltic newspaper:

“Reliable sources tell LETA that the International Monetary Fund (IMF) has stipulated that the loan agreement document must be signed by all ruling coalition parties in Latvia, thereby showing their resolve to implement it.”

The reason the IMF are now so edgy is spelled out by Reuters Political Risk Correspondent Peter Apps:

A string of other countries are also facing stark cuts, and analysts say in many – like Latvia – domestic politics could well intervene as elected politicians are unwilling to face the political consequences of cuts demanded by the IMF and wider financial markets.

So what the IMF are evidently worried about is the possibility that some coalition members may support the agreed measures just long enough to get the payout, and then effectively disown them. This seems to be a far cry from the substantial political commitment that was earlier considered to be so essential to maintaining the peg.

And the issue goes well beyond Latvia, since as Apps points out, a string of other countries are in a similar if currently marginally better condition, including Bulgaria, Romania, Lithuanis and Hungary, all busily making cuts while coming to rely more and more on multilateral lenders.

So if there is no clear resolution to Latvia’s growing dispute with the IMF, the European Union could end up facing a dilemma – whether to bail out troubled emerging European countries who won’t make cuts or face the consequences of not doing so. As Lars Christensen, head of emerging markets research at Danske Bank in Copenhagen says:

“This could be a test case for Europe….In Latvia, it’s domestic politics that really become the driver. The question is what the EU would do if the IMF walks away.”

A good question.

In the above quoted IMF document, they also make the following point:

Correcting currency misalignment without nominal depreciation is extremely difficult, as experience from other currency board and fixed exchange rate countries continues to show. Large external financial support and sustained wage and fiscal discipline by both the private and public sectors are required. Failure could entail substantial reputational risks for both the authorities and international institutions.

The last sentance is important, failure could entail substantial reputational risks for the international institutions involved, in particular in this case for the IMF and the EU Commission. This loss of credibility should the peg eventually collapse in chaos is one of the considerations that lead some of us to argue strongly from the start against going down this road. But few would listen.

Beyond the immediate issues of the peg, there are also serious structural considerations which make this kind of “body-with-two-heads” approach less than desireable in delicate situations such as this. Even if all we have here is – as some would suggest – a soft-cop hard-cop duet, the policy of letting the EU Commission permanently play the role of soft cop is hardly desireable, especially for the message it will be sending to Southern Europe, where our improvised duo may soon find themselves once more forced into action. And especially also for financial markets where nervousness about the ability of Europe’s complex institutional structure to handle the evident continuing weaknesses in the banking system is still highly evident. Leaving the impression that the EU itself is not able single handedly to deal with its own recalcitrant offspring is not exactly the best way to convince the sceptics.

Today’s Latvia Roundup

The exact state of play in the negotiations with the IMF is still far from clear. Latvia’s Prime Minister Valdis Dombrovskis said on Thursday that talks with the IMF were making progress on issues of pensions and taxes and results of the talks are expected early next week, but since we have been getting news like this for some days now it is hard to draw conclusions.

Izabella Kaminska at FT Alphaville thinks the analyst community is increasingly interpreting the deadlock as yet another (and possibly decisive) chink in the armour of Latvia’s euro-peg defence, citing in particular the latest research note from the RBC Capital Markets’ emerging markets team. While Capital Economics’ Neil Shearing is even more explicit:

Relations between the IMF and Latvia are deteriorating quickly, raising the prospect that the loan programme that is vital to maintaining the country’s currency peg could collapse altogether….. with relations between both sides souring, and the pain in the real economy intensifying, it remains to be seen how long a new agreement will hold. Indeed, there is a growing risk that the programme could collapse altogether, which would spell the end of the currency peg and trigger a round of debt restructuring.

As for me, I agree with Neil, this situation has now become so unstable, while the internal devaluation is working so slowly, that the Fund really need to think about how to handle the damage containment issue. The crisis is far from over in the East and South of Europe, and the risk of a spark from this whole fiasco setting either Athens or Madrid alight is most certainly non-negligable. I advise all concerned to think very carefully at this point about the implications of what they are doing, for the sake of all our well-being. The Maginot line may still be far from broken, but a distant fortress on our outer defence ring may well be about to fall. Let’s just learn the lessons shall we?

Mario Draghi States The Obvious

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The Italian economy will need to expand at a faster pace than averaged over the past decade for the government to be able to reduce Europe’s biggest debt. “We will emerge from the economic crisis with more debt and higher unemployment,” governor of the Bank of Italy Mario Draghi said in testimony to a parliamentary committee on organized crime. “In order to reduce them, we should be able to grow at a faster pace than over the last 10 years.”

Well, growing more rapidly than over the last ten years should not, in theory be difficult, since according to my calculations, and using the forecast of the IMF, the average rate over the last decade will be more or less zero by the end of next year. That is to say, GDP by the end of 2010 should not be much above GDP in 2001. Wanting to grow faster and actually doing it are, however, two different things. Indeed, I reckon the Italian economy is just as likely to contract over the next decade as it is to grow if you look at the trend line in the chart below.

Hungary Struggles To Apply Its Own Unique Version Of “Internal Devaluation”

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Just what the hell is going on in Hungary? This is the question which even the most cursory inspection of the latest round of data coming out of the country leads me to ask myself. What the hell is going on and just what kind of correction is this the IMF are presiding over here?

In May, according to the latest data from the Hungarian statistics office, in the Hungarian private sector real wages were up, and employment was down. Meanwhile in the public sector, real wages were down, but employment was up (contrary to what was supposed to be happening). A recent programme to get workers off the unemployment roles and back to work seems to have had the perverse and contradictory impact of offsetting the fall in private sector employment by giving a sharp boost to public sector employment. So while total employment has remained more or less stable, the balance has shifted, and in the wrong direction. Meanwhile, in an attempt to stem the bloodletting in public finances (the economy remember will probably contract by about 7 percent this year) VAT was raised – by the significant margin of 5 percent (from 20% to 25%) on July 1st, giving consumption, which was already falling sharply, another sharp jolt downwards. Not only that, the Hungararian economy, in order to maintain the value of the forint more or less where it is (all those forex loans) was supposed to be having a major downward correction in wages and prices, yet inflation (which was already at an annual 3.7 percent in June) will surely now be given a hefty kick upwards. So, I ask myself, how does any of this actually make sense, and to who? And meantime the problem of the forex denominated loans remains, and goes jangling around (like any good jailor does) in the background, putting an effective stop on monetary policy just as fiscal policy switches over to complete contracton mode. This is why I talk of “internal devaluation”, since the Hungarian authorities (with the agreement of the IMF and the EU Commission) seem to have decided that, rather than resolving the issue of the CHF loans once and for all, they will down the same road that is proving to be so disastrous in Latvia, even though they have their own currency to devalue, should they choose to do so.

At the end of the day, the big question which we are all left with is, whether this structural shift in employment, away from the private sector and towards the public sector, and the increase in the consumer price index to be caused by the sharp VAT hike, plus the ongoing rise in real wages, really is the outcome the IMF support programme was intended to achieve? Continue reading →

Why Latvia Is In Such A Mess

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Hat Tip to Aleks Tapinsh – “No wonder this country is in such a mess. Someone posted this video of a payday at the Elkor electronics chain in Latvia. The paycheck as you can see comes in an envelope, in cash. No one pays any taxes. And everyone happy. Or not”.

Second example: Prime Minister Valdis Dombrovskis cited in a press conference in Riga yesterday the fact that some companies, including state-owned companies like Latvian Railways, had tried to cheat the social security system by significantly raising the wages of some of its employees (in his example from 1,000 lats a month to 12,000 lats a month), thus apparently raising their pay into the social security system. That way, if a person gets laid off, they’d get 70 percent of the new and improved wage.

Now two recent quotes from my blog interpreting yesterday’s comment from the Economy Minister – (Viz: “Representatives sitting in Washington and educated at Yale do not fully understand what is going on in Latvia”)

“To provide with logic behind quote of the economics minister, I believe he thought that the EC and IMF does not realize the scope and importance of grey economy in the country. With that figure hard to estimate (ranging from 15%-40%). Any increase of Tax base will only push the economy on the gray side both for individuals (tax exemption on income earned) and for companies (unaccounted cash revenue, forgone taxes,etc). Thus resulting in even less tax revenue that initially had and larger budget deficit to balance. As for VAT tax, as a sign of protest, some of the local companies have publically annouced the full closure of their business if the VAT is raised to 23%.”

“Yep, stupid comment when at the same time you are reaching out your hands to receive their money… That said, the IMF does not really fully understand if they think they can introduce e.g. a progressive income tax and raise more revenue. Very hard to do in a country that does not believe that higher taxes will benefit the population and where tax avoidance is an art mastered by most.”

The Invisible Hand That Adam Smith Forgot

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The population regulation one.

“The chief goal of all other species is to turn food into offspring. More food means more offspring. It is this biological logic that underlies the perennial fears of human overpopulation. Most creatures live in environments that correspond to open access commons. Recent fertility trends strongly suggest that the simple biological model of human breeding is wrong, or at least, is wrong when the institutions that support economic freedom and the rule of law, e.g., markets, price stability, honest bureaucracies, security of private property, and the fair enforcement of contracts, are well-developed. Economic freedom and the rule of law are the equivalent of enclosing the open access breeding commons, causing parents to bear more and more of the costs of rearing children. In other words, economic freedom actually generates an invisible hand of population control.”

Ronald Bailey, Reason magazine’s science correspondent, in The Invisible Hand of Population Control – The tragedy of the commons meets economic freedom. Now go read!

Is Hungary Also Distancing Itself From the IMF?

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So many things are so unclear at the moment. What attitude does the IMF actually have towards the current Latvian bailout programme? Is there really a “spat” taking place between the EU Commission and “the Fund”, and just what is going on in Hungary? In fact, I have a longer post going up later on today which will ask just this very question, but in the meantime, we could ask why the Hungarian Finance Ministry was so happy to pay 6.79 percent to sell one billion euros worth of bonds last Friday, considerably more, for example, than the the 5.9 percent on existing euro-bonds due May 2014, and more than they would pay the IMF for the forthcoming tranches of their loan.

Hungary sold its first debt to foreign investors since last year’s International Monetary Fund bailout, taking advantage of the world’s strongest bond market rally to borrow 1 billion euros ($1.4 billion). Investors ordered 2.9 billion euros of the securities, nearly six times the 500 million euros the government initially planned to raise, Finance Minister Peter Oszko said in an interview today. The government lured buyers by offering a yield of 6.79 percent on the five-year debt, more than the 5.9 percent on existing euro-bonds due May 2014.

According to some this sale was a huge success:

“The transaction has a very positive message,” said Gabor Orban, head of fixed income at Aegon Hungary Fund Management in Budapest, who manages about 3 billion euros of assets. “Hungary is able to return to market financing, both in forint and euros.”

But the explanation may be far more complex. According to Portfolio Hungary this morning, it is now possible that the next tranche of the IMF credit facility due in September will be drawn by the central bank and not the Hungarian government (citing András László Borbély, Deputy Chief Executive of Hungary’s Government Debt Management Agency – AKK). If this were to be the case the next time the government would need to resort to the IMF’s stand-by arrangement would be in 2010. On the other hand, the next tranche of European Union’s share of the bailout would still be drawn.

Now perhaps if I were not so focused on what is happening in Latvia nothing here would strike me as odd. But there is a pattern which does seem to be repeating itself, with both Latvia and Hungary ceasing to be dependent on IMF funding. In fact the 1.43 billion euro June tranche of the IMF loan was already drawn by the National Bank of Hungary and not the government. The key difference is that when the NBH draws on the credit facility, the money drawn does not increase the level of government debt, although it does raise the stock of foreign exchange reserves, and thus provide added protection against speculative attack. The loan on the one hand cannot be used to finance the budget deficit, but on the other the IMFs hand is weakened in negotiations about structural reforms etc.

András Borbély is even quoted as saying that it is possible Hungary will not need not to resort to any more IMF help this year, as its access to market-based financing has increased given the successful Eurobond issuance last week, which could become a substitute for the next IMF tranche of about EUR 1.5 bn due in September. At the same time, the government is still planning to draw on the credit facility made available by the European Commission. So is it just me, or is there actually an institutional backdrop to all this? Certainly having the IMF take responsibility for EU states never made a great deal of sense to me, but with the EU Commission now assuming a large chunk of Latvian sovereignty, and with the same possibly about to happen to Hungary, not to mention other CEE states, and Ireland, Greece and Spain, are we not, perhaps on the point of witnessing an epoch making tectonic shift in EU institutional architecture? And all without anyone visibly being aware that it was in fact taking place.

Danskebank’s EMEA Daily Latvian Quote Of The Day

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Quote of the day: “Representatives sitting in Washington and educated at Yale do not fully understand what is going on in Latvia”, Latvian Economics Minister Kampars yesterday on the Latvian TV programme 900 sekundes.

As they point out, when the borrowers publicly criticise the lenders in this way, something must be going on.

While Mr. Kampars might be right on his assessment of the IMF staff, it is certainly unhelpful for further negotiations (if there are to be any) to bad mouth the institution that is supposed to give Latvia a loan. In our view it increasingly looks like the IMF will not pay out the next instalment on Latvia’s loan. This not only has ramifications for Latvia, but should also be a reminder to investors that the IMF is not just a “money machine” that automatically bails out all countries with funding needs.

Also Danskebank provide some simple calculations to illustrate the extent to which Latvia does still need the IMF funds:

A back of the envelope calculation illustrates this. In June, central government spent about EUR 125m more than came in revenues and funding. Assuming that this “burn rate” continues for the rest of the year (August-December) then that adds up to EUR 625m for the rest of the year. Furthermore, during the rest of the year EUR 715m worth of t-bills are maturing which need to be rolled over. Hence, the refinancing of maturing debt and the monthly cash burn adds up to EUR 1,340m. In our assessment the Latvian state treasury probably has EUR 540m in liquidity at the moment. That leaves the Latvian central government with a funding need of EUR 799m. This is why it is important that the EC in the Supplemental MoU ties up half of the EUR 1.2bn instalment for the financial sector, as the amount that will be “free” to cover the budget deficit will be less than the funding need (EUR 600m vs EUR 799m).

Thus, according to Danske the Latvian government will be around 200 million euros short by the end of the year – unless it is able to roll over more than half of the maturing debt, something which would require sustained perfect conditions for issuance in the local money markets for the rest of the year, unlikely given that the international markets are more or less closed to Latvian debt, and that non receipt of the IMF share would hardly increase the risk appetite.

Parex Update

The situation at Parex bank seems to be giving rise to all sorts of speculation at the moment. It has been suggested that the Banks owners have been systematically taking advantage of the bailout to line their own pockets. Some support for this view can be found in the statement of the Latvian Finance Ministry last Friday that it had asked the state prosecutor’s office to probe Parex takeover last year.

RIGA, July 17 (Reuters) – Latvia’s Finance Ministry said on Friday it had asked the state prosecutor’s office to probe the state takeover last year of a major bank that helped trigger the need for the country’s IMF-led bailout.

The IMF has delayed its latest share of lending in the bailout, though the EU has decided to give a further 1.2 billion euros. The prime minister said he would hold more talks next week with the International Monetary Fund (IMF). Some local media reports and politicians have criticised the wisdom of taking over the country’s second largest bank, Parex, and the way it was done. Most recently the media has reported that some former employees left with big handouts. Finance Minister Einars Repse said he had asked the prosecutor’s office to investigate the takeover to clear up such controversies

What the connection is (if any) between the “Parex affair” and all the other unknowns we have in our equation set at the moment still remains to be seen.

And finally, to close, here’s yet another Latvia quote, this time from former IMF chief economist Ken Rogoff:

“It is so clear that Latvia’s peg is ultimately unsustainable, all protestations by Latvian government officials notwithstanding,” said Kenneth Rogoff, a former chief economist at the I.M.F.. “But ultimately unsustainable pegs can go on for years before crashing and burning, and Brussels seems to be willing to pay a lot to get past the financial crisis before cutting the cord on Latvia.”