Thursday, July 23, 2009

Tough Times in the Baltics

Latvia is approaching an economic meltdown that could bring people out on the streets and the IMF is not helping the situation with its demands that collide with what the EU wants, and has received.

Latvia is not alone in Europe to feel the effects of the global recession, but it's recent failed bond sale back in June was, to say the least, eyebrow raising. All of Europe has struggled with stimulation plans that simultaneously increase budget deficits. For example, public debt in the UK was 52% of the GDP in 2008. Now,it is over 68%. Similar problems have appeared in Hungary, the Czech Republic, Spain and Estonia, to name a few.

Street demonstrations have became violent in Latvia at the beginning of 2009. As countries seek budget cuts to deal with deficits, demonstrations have increased in France and Greece.

Latvia's bond sale failure raised an issue with its monetary peg to the Euro (a requirement) prompting a demand by the EC to cut its deficit, which it did by dropping 10% from its pension funding. The EC then provided loan funds to help stabilize the economy. This is a tough decision, as cuts in social programs can easily translate into street riots. But, the EC required that 50% of the tranche be spent on shoring up the banking system.

Enter the IMF. They don't care as much about the banking system. So, their demand is a further cut in social programs - particularly in the pension system. This is asking for trouble and continues the history of the IMF demanding budgetary reforms which it knows, or should know, will result in social unrest. In the Baltics, of course, this plays into the hands of Russia which is happy to provide loans for political and not economic reasons.

The IMF is requiring changes that the EC does not. It is knowingly requiring budget cuts that will result in social unrest. During a global recession, this is certifiably stupid and I don't blame the Latvian Prime Minister Dombrovskis for saying "no".

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