* The Baltic private sector on the road to extinction = Devaluation before long
This silly game has run its course and by now even the most anti deval fundamentalist politicians seems to realise that devaluation will be unavoidable. Latvia is first in line to let their currency go. Latvias economy is by now entirely dependent on the extent of foreign loans in order to keep the fixed currency regime going.
Are the citizens of Latvia really willing to take on this extra debt burden to defend a fixed currency regime bound to fall anyway? If yes, how much are they willing to take on? Global happy days are not coming back tommorrow, despite the recent months of assetmarket bullish sentiment. It will more likely take years. How much debt does that equal? To reach the Euro? And then what? Debt still has to be paid-or?
I seriously question if there is any strategy at all (apart from the Euro dream), behind the Latvian politicians clinging to the fixed exchange regime. IMF had better use all their resources and experiences they have to administrate the chaos that will follow on the back of the Baltic devaluation. The Baltic politicians IMF are talking to today are not likely to be there in a years time.
* Use IMF capital to stabilise the initial friction post deval instead
IMF should prepare a significant rescue fund for the Baltics. Let the Baltic currencies float freely. Use the rescue funds to stabilise they social consequences that will follow initially so that people will be able to have homes, and a minimum level of income in order to support their families. Negotiate with the Swedish banks and their Government in order to make realistic and quick debt writeoffs. The Swedish Government will most likely have to finance the Swedish Banks SEB and Swedbank anyway, hence they will become the main negotiating partner.
From there, the Baltic states can have a restart, getting their exports going again, generating jobs, income, social structure, stability, etc
*The Swedish government should let shareholders, bondholders in SEB and Swedbank pay the price.
Minimize the damage to Swedish taxpayers by letting the risktakers pay as much as possible. The Swedish taxpayers will pay heavily still, unfortunately.
Transfer bad bankassets to the state at marketprices. Take over ownership of Swedish banks in a transitional phase. Restart.
*Refocus on European banks bad assets = shaky CEE markets return = refocus on Euro area bad assets
Baltic devaluations risk being the trigger for CEE shakiness again. Since the Euroarea is intertwined with it via their banks balancesheets, a refocus on the state of the Euroarea is likely. Since the European banking system is in more dire straits than the US one it is not likely to be bullish for assetmarkets. Once again, there is no comprehensive and coordinated European plan to deal with a worsening scenario from here. Not good. Fingers crossed it will all just go away. With US coming to the rescue - as usual. China is also counted on. Unfortunately I doubt neither the US , nor China will come to the rescue this time around.
* New positions and position changes
- Took profit on my long Eur/Sek
- Took profit on my long Usd/Jpy option
- Took profit on my long Eur/Huf
- Increased my long Eur/Lvl forward
As usual, good luck
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