S&p Downgrades Baltic States' Debt Ratings

[interestrateripoff]

http://www.telegraph.co.uk/finance/finance...bt-ratings.html

Standard & Poor’s, the credit-rating agency, cut Latvia’s rating to “BB†and warned that its economy will contract by a further 16pc this year. The public debt will vault from 19pc of GDP last year to 80pc by 2011. “This very fast increase in debt is unprecedented,†said Moritz Kraemer, S&P’s head of sovereign ratings.

S&P said the country is facing a “struggle†to find a path back to growth while also maintaining its currency peg, but the agency stopped short of advising whether devaluation would help.

There is an intense debate in the Baltics over whether the euro pegs are themselves causing an unnecessarily harsh adjustment, entailing salary cuts of up to 20pc. The International Monetary Fund had privately suggested a devaluation in Latvia to help cushion the blow, but this was overruled by the European Union on grounds that most of the country’s corporate and mortgage debt is in foreign currencies.

GDP has fallen 20pc in Latvia and 22pc in Lithuania over the past year – more concentrated falls than anything seen in the Great Depression. Both countries expect unemployment to peak at almost a quarter of the workforce.

Valdis Dombrovskis, the Latvian premier, said there were signs of stabilisation. “I am convinced that the economic indicators will improve next year.†The IMF, the EU and the Nordic states have helped Latvia with loans equal to 30pc of GDP but the benefits are being eroded by capital flight. Nordic banks are rolling over “considerably less†than 100pc of the cross-border loans to their subsidiaries as they adjust to rising defaults.

Latvia has swung from a huge current account deficit into surplus this year, but S&P said the speed of deleveraging is itself “exacerbating the severity of the contraction, with negative implications for asset quality in the local financial systemâ€.

Neighbouring Estonia was downgraded to “A-â€. The better grade reflects its flexible economy, fiscal reserves, and a highly-rated currency board, but it too faces currency flight.

Still to high?

Flexible economy means sacking people faster?

How long before this causes a European banking crisis?

[ralphmalph]

Yup, preparing to join the Euro is a brilliant idea, NOT!

[wonderpup]

Standard & Poor’s, the credit-rating agency,

As one liners go, that's not bad. Given their track record on Mortgage backed junk these guys are either crooks or morons- why does anything they say still carry weight? Why are finance and economics the only professions where it's possible to completely screw up on every level and still reamin in post and apparently with reputation intact?

totaly bizzare.

[interestrateripoff]

As one liners go, that's not bad. Given their track record on Mortgage backed junk these guys are either crooks or morons- why does anything they say still carry weight? Why are finance and economics the only professions where it's possible to completely screw up on every level and still reamin in post and apparently with reputation intact?

totaly bizzare.

Unforeseen events?

I mean how could they have predicted that people with NINJA loans wouldn't have been able to repay them back especially when interest rates went up?

Although to be fair no central bank bothered modelling this even in their heads, clearly too complex for them to think about.

[campervanman]

Yup, preparing to join the Euro is a brilliant idea, NOT!

-1

Yes if the UK had joined the Euro it might have been persuaded to have a proper economy for the past 10 years and even worse it couldn't print it's way out of recession.

[interestrateripoff]

-1

Yes if the UK had joined the Euro it might have been persuaded to have a proper economy for the past 10 years and even worse it couldn't print it's way out of recession.

Considering the Eurozone had lower interest rates for most of that decade what do you think would have happened to the housing boom?

For me your comment is a fail.

[Vaevictus]

Considering the Eurozone had lower interest rates for most of that decade what do you think would have happened to the housing boom?

For me your comment is a fail.

You assume that if we were part of Europe all that time, that the Euro interest rate would have been the same.

[ralphmalph]

You assume that if we were part of Europe all that time, that the Euro interest rate would have been the same.

Of course it would have. It is set for the German economy not for anybody else.

[ralphmalph]

-1

Yes if the UK had joined the Euro it might have been persuaded to have a proper economy for the past 10 years and even worse it couldn't print it's way out of recession.

It persuaded, Ireland, Portugal, Spain and Greece to have proper economies. Ireland and Spain have economies soley built on property and practically nothing else nothing else from a bit of tourism in Spain.

[Meerkat]

Of course it would have. It is set for the German economy not for anybody else.

And, more importantly, their mentality and attitude towards money/debt. But, guess, that's what you meant.

[the_austrian]

It's hard to know how the rating agencies come up with a number for national debt, what do they base it on, none of them have any possibility of paying it back so how do they differentiate between States? The same applies to most of the zombie companies, unless we keep perpetual monetary expansion they are all underwater across the whole economy. It's a zombie economy they are all the living dead. What's the point in picking a winner from among them?

[bearwithasorehead]

Anyone got any information on how this has affected the balance sheets of Nordic, German and Swiss banks? Presumably they are writing off c. 10% of their loans to E Europe?

[ralphmalph]

And, more importantly, their mentality and attitude towards money/debt. But, guess, that's what you meant.

Yes you are right. Actual mortgage rates could be .5% in Germany and you still would not get a property bubble.

[Vaevictus]

Of course it would have. It is set for the German economy not for anybody else.

It's weighted based on the economies that exist within it, and as germany is the largest EU economy it makes sense it is weighted heavily towards it. But to say IRs are set entirely for the Germans is false.

Otherwise, we would see IRs lower, QE higher, all in an effort to weaken the Euro to help german exports.

Germany is being killed by the strong Euro.....

I was pointing out that had the UK (with its relatively strong economy) been in the Euro the last 5 years, the outcome of the ECB's IR decisions may have been different.