Sunday, June 07, 2009

Latvian Devaluation Imminent?

Following the failure of a bond sale, speculations of a Latvian devaluation has increased. For more details on the subject, see Claus Vistesen's posts on the subject (see here, here and here). While I don't endorse all of his arguments and conclusions, the posts are nevertheless informative.

Latvian officials seem in short determined not to devalue or float. Whether or not they will succeed with this depends on whether or not they get loans from IMF or others to finance the budget.

It could be noted that the deep slump have already recreated external balance. After having a current account deficit of nearly 20% of GDP, Latvia has actually had a surplus in recent months. With Latvia having already eliminated its current account deficit, it doesn't seem like Latvia is really in need of a competitive devaluation. And as was noted before, a devaluation would slow the necessary adjustment process.

However, if the widespread expectation of it makes it impossible for the Latvian government to finance itself, it might become unavoidable as a self-fulfilling prophecy.

UPDATE: It now appears that IMF funding has been secured in return for further reductions in government spending.


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