Thursday, October 09, 2008

Good News, Bad News From Latvia & Estonia

The good news from the Baltic countries is that inflation is falling in both absolute and relative terms. In Latvia inflation fell to 14.9% in September, down from 15.6% in August and 17.7% in May. In Estonia, inflation fell to 10.5%, down from 11.1% in August and 11.4% in May. By contrast, euro area inflation is down only to 3.6%, from 3.8% in August and 3.7% in May. Both the absolute and relative level of inflation will continue to fall in coming months because of the fixed exchange rate versus the euro and the economic downturn.

And now that we're on the subject of the economic downturn, the bad news is that the downturn appears to be getting worse. In Latvia, industrial production fell a full 11.1% from a year earlier, and in Estonia real retail sales fell 6% from a year earlier. It seems pretty safe to say that the downturn will get worse before it ends, something that is bad news for Swedbank and the other Swedish banks with high exposure to Latvia and Estonia.

In the medium to long term though, to the extent the fixed exchange rate limits the discretionary powers of the government, it will also limit the ability of government to mess things up further and so enable Estonia and Latvia to purge their excesses and thereafter start a new recovery.


Anonymous Anonymous said...

I find it quite amazing that still the majority of people who comment on Swedbank like you do have still not bothered to pick up the last annual report (you can download it from the internet). I said it before, please have a look at Swedbanks balance sheet and that of their Baltic subsidiary Hansapank (yes, it's spelled with a "p"). If you finally do, which is hopefully before your next comment, you might understand the loan to deposit ratio they have, the duration mismatch on their balance sheet and the impact of a rating downgrade on their risk weighted assets and tier 1 ratio. Again, it's not about the profits they book, it's about the balance sheet. Just to make my point clear, DnB Nor was days away from bankruptcy last week and got bailed out by the Norwegian central bank because of liquidity issues, which is a function of their wholesale funding dependency (e.g. bad loan to deposit ratio) not because they made losses!!! And I'm amazed that you actually draw a conclusion between the Euro peg of the worthless Baltic currency and inflation. You mention before that you look at the Austrian School of Economics. Inflation in the Baltics is a function of the reckless lending (read: money supply) of Swedbank and SEB in the Baltics. The reason why inflation is going down in the Baltics is, because those banks are struggling to fund themselves and can't increase their lending as much as in the past. The covered bond market in Norway, Sweden and Denmark is frozen, what do you think can happen to the worthless Baltic currencies? Well, have a look at Iceland, Ukraine, Hungary to get an idea.

2:09 AM  

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