Billions in debt service well into the 2010s?

If anyone has any illusions about a recovery of the Latvian economy in the foreseeable future,  they should check out some figures obtained from the State Treasury (Valsts Kase) by a researcher for the popular TV discussion show Kas notiek Latvijā? (What is happening in Latvia?). The Latvian version is here. 

Without getting into a whole muddle of numbers, by 2014, even based on current state borrowing (and, as I understand it, excluding the 7.5 billion EUR the government has obtained from the IMF and the EU), Latvia will be paying at least 1 billion LVL per annum in credit servicing (interest and repayment of principle) costs. Adding in the foreign credits, these payments will be almost 10 billion LVL up to and including 2020.

With economic growth stagnating for any number of reasons -- higher taxes, poor productivity, corruption, confused and clueless policies -- the debt load will probably prevent Latvia from joining the euro zone (you must have government debt below 50 % of GDP) in the foreseeable future. At some point, too, the lat will have to be decoupled from its 1 % corridor against the euro. although with such a huge euro debt, a devaluation will have an even more devastating effect on the ability of the country to repay its international borrowing (as well as on all domestic and household borrowing in EUR).

Add to this the fact that it appears Latvia will not even get its next payment from international lenders, since the new Dombrovskis government has agreed to only less than 300 million LVL of the 700 million LVL budget cuts required by the lenders as a precondition to continued payouts. It is very unlikely that the EU and IMF will cut Latvia any slack on this, and the 700 million cut will probably end up reducing public services below some critical minimum. That is not to say that Latvian government could not be run much, much more efficiently, but there has been too little effort (none practically) to think in terms of smart government and of a very careful prioritizing of cost cuts.

Quite the opposite-- a recent story  (in Latvian) on the State Audit examination of the huge cost overruns on the so-called Southern Bridge in Riga, boosting its cost from an initial just over 108 million LVL to 570 million LVL. That is the kind of money that India is spending on its next Vikrant class aircraft carrier. Of this cost to the municipality of Riga, 264 million lats (or some 0.87 santims for every lat spend on actually building the bridge) constitute debt service (cost of borrowing). Indeed, the entire project is one gigantic clusterfuck of cost overruns and waste probably repeated on a smaller scale in the way other municipalities and government institutions do business. Indeed, one figure of 27 million LVL pissed away by the idiot city fathers amounts to the money scraped together recently for support to dairy farmers. This bridge boondoggle will also have to be paid off, along with the debt servicing mentioned above.

The bridge story fits in well here, because it is a story of how money is misspent through Latvia's third-world rathole level of corruption, incompetence and idiocy in government. The idea of lending Latvia some 7.5 billion EUR is that it will keep the institutions of governance funded so that the economy can start recovery (maybe not even drawing down the credit line in full).  However, 7.5 billion is also the largest embezzlement, waste and corrupt diversion of funds opportunity ever presented to Latvia's ruling elite. Looking at how this country builds bridges for the price of an aircraft carrier, and how it wasted the so-called G-24 loan of a few tens of millions, of how it cluelessly beggared itself rather than saving its tax surpluses as warnings of an economic downturn multiplied, it is likely--bordering on certain-- that the EU and IMF funds will also be wasted and decimated by corruption and mismanagement.