Baltics and CEE back on the radarscreen before long?

* Latvia 1Q GDP dropped 18% - get ready for further drops.
In the midst of the bearmarket rally it might be a sobering reminder that all might not be happy hunky dory days after all. With the Latvian GDP down 18% for the 1Q and harder times still ahead for this country, this number will most likely continue to be grinding, if not dropping, downwards.

What surprised me was that unemployment was still "only" at 11%. With the private sector heading for near extinction, I expect this number to skyrocket to above 20% within the next 6 months. (I guess the IMF money can create loads of public sector jobs for a while, but,,,) In any case, the Latvian authorities had better keep this number under control in order to avoid social upheaval. At 25%-30% unemployment rate, the foundations of Latvia as a democratically functioning country will likely be sliding.

The IMF has yet to make a decision on whether they will grant Latvia the next installment payment of 1.6 Bn Eur due in June. It supposedly hangs on whether Latvia can bring their budget deficit to 5% of GDP. The last estimate from the Latvian government themselves was -7.7%.

With GDP sinking like a stone I guess the risk is for the deficit in terms of share of the GDP to increase further. In other words, Latvia will not be able to fulfill the IMF criteria, not now and not later in the year. As Ive mentioned before, I dont think it will have a material impact on the IMF payment schedule anyway. Latvia will get their money, or else the country will swiftly become insolvent.

What I do wonder though, is if there will be strings attached. One would be to let go of their fixed currency regime. This would be, ehhmm, sensible, to say the least. For IMF to assist in upholding Latvias fixed currency regime despite the local economic realities and the surrounding economic environment can simply not be motivated on economically sane grounds.

The British writer Will Self launched the "Quantitative theory of insanity". According to this one there is a fixed portion of sanity in the world at any one time. As one group becomes more sane, another group becomes more insane. Well, it seems to me the people in charge of the Latvia fixed exchange rate policy surely has not become more sane. The question is; who has then?

Disclosure; I am long Eur/Lvl forwards.


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As usual, good luck







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