Wednesday, September 09, 2009

Latvia to borrow USD 800 million domestically by year end?

The Latvian government has promised international lenders to raise LVL 400 million (more than USD 800 million ) from "domestic sources" by the end of this year, according to a confidential document leaked to the national news agency LETA.
In addition to the document, it is understood that the Latvian State Treasury (Valsts Kase) has already drawn up a schedule of debt auctions and target yields.
With less than three months remaining in 2009, it appears that there will be frequent, high volume sales of treasury bills or other debt instruments, perhaps on a weekly basis, for the rest of the year.
The large volume of borrowing in a poor country of 2.2 million is likely to drain all liquidity from the money market unless foreign bank subsidiaries or other foreign investors come in as "domestic" bidders in the auctions.
It is likely that such heavy government borrowing will effectively squeeze out Latvian small businesses and private borrowers who are already complaining about banks being reluctant to lend. In addition, the squeeze is likely to boost domestic interest rates even further.
Since the largest Latvian financial institutions are Swedish owned, participation by Swedish subsidiary banks would increase the Swedish financial sector's already high and precarious exposure in Latvia and the other Baltic states. Although state debt is generally rated as very secure, there is an inevitable linkage between the huge Swedish exposure in mortgage and private lending and state finances. Large-scale defaults and renewed pressure on the Latvian currency could, in the future, lead to stop-loss selling of Latvian treasury bills.
The failure of a modest-sized treasury bill sale earlier this year led to turbulence on Scandinavian stockmarkets and intervention by the Bank of Latvia to support the lat.
The LVL 400 million domestic borrowing target also raises questions about the true size of Latvia's budget deficit, which was supposed to have been covered by loans from the European Union and the International Monetary Fund (IMF).
The confidential document also indicates that Latvia must work to restructure its existing debt stock to increase maturities and reduce the risk of rollover (in simple terms, borrowing from Peter to pay off Paul, then hitting up Paul again when Peter has to be paid back).
The document, which found its way to the Latvian news agency, is apparently very sensitive, with Finance Minister Einars Repše interrupting remarks by a member of the Latvian parliament, the Saeima, warning the man that he was about to disclose state secrets. The parliamentarian referred to provisions in the confidential document that "would be of great interest to financial speculators."


Anonymous said...

Maybe this explains why the EU was so insistent that half of the money it gave Latvia in its latest instalment MUST be used to support the financial sector, even though it could be used better elsewhere?
So EU gives cash to Latvian govt, which gives it to the banks, which gives it back to the government while earning a nice little profit on the side...

Anonymous said...

The most surprising thing is that according to Ministry of Finance presentation, no money is given to viable banks (only to already dead) and 50% of the loan is still unused.

Anonymous said...

Boy, it looks like Swedish have a lot of pull with the folks who make lending decisions. Loaning money to someone who is completely broke and may never repay a debt makes no sense whatsoever.

Anonymous said...

Forgot to ask. Do Latvian citizens and businesses have enough faith in the country and government and means to shell out 800 mln bucks to buy a state DEBT? Just curious...

Mr.Key said...

Sounds really bad. :( Have to conclude that yes, it's failed. But no, its not a question. It's failed a long time ago ;)