The strange death of liberal "Diena"

NOTE: Corrected the spelling of the British family to ROWLAND in a few places.

October 10 turned into a day of written and video/audio soundbites amounting to obituaries for Latvia's (once?) leading daily "liberal" newspaper Diena (The Day). It was no wonder, as the chief editor of the Diena media group, Nellija Ločmele, the editor-in-chief of Diena, Anita Brauna, the editor of the editorial and op-ed page, Pauls Raudseps and several senior reporters announced their resignations after it was disclosed that Diena (along with Dienas bizness, a business daily) had been sold to the British Rowland family.

The Rowlands are said to have financed the transaction when the Swedish Bonnier publishing group and agreed to convert their loan into shares in a mutual fund that became the owner of both Latvian media companies. However, there are contradictory reports as to whether this was the actual sequence of events.

The departing editors said they could not work together with the new managing director of the Diena publishing group, a former executive at the company who returned to engineer and execute the transfer of Diena and Dienas bizness from the Bonnier group to the new owners.

Founded as a government-owned but independent newspaper in 1990, while Latvia was still a Soviet republic, Diena was "liberal" in the classic sense of standing for individual rights, freedom, Western-style democracy and values.

In July, it was announced that the Swedish Bonnier publishing group, the owner of Diena and the business daily Dienas bizness (this blogger worked for Dienas bizness for 11 years) since the early 1990s, was selling both newspapers to a Luxembourg-based company owned by Aleksandrs Tralmaks, a former executive with Diena (some years earlier) and Kalle Norberg, an Estonian financier. The transaction was financed (temporarily) by undisclosed lenders as part of a scheme to set up a Luxembourg based media mutual fund.

The transaction, with so many unknowns, set off a frenzy of speculation, much of it verging on paranoid fantasies that Latvian oligarchs, Russian intelligence services and other evil powers bent on destroying Diena or using it to brainwash the population were actually behind the deal.

To be sure, the transaction was hasty, largely because the Bonnier group was eager to get rid of their Latvian assets as quickly as possibly, while keeping their business newspapers in Estonia and Lithuania. It was going to take Tralmaks and Norberg a few months to set up their mutual fund, longer than the Swedes were ready to wait. In a move that would later be one of several reasons for things unravelling as they have, Tralmaks and Norberg raised funds for the purchase from undisclosed lenders. Tralmaks said the real owners of Diena and Dienas bizness would be disclosed on October 1, but later delayed the announcement until October 9.

By then, three months of secrecy, contradictory hints (at one point, the transaction was said to be financed by some of the founders of Skype)and internal recriminations and arguments about future business strategy had taken their toll. There was, in all likelihood, an irreparable rift between the top editors and Tralmaks by mid-September, when rumors of Ločmele's and Brauna's resignations first appeared.

Tralmaks had proposed drastic cuts in production expenses for Diena of around 55 %, which would have led to considerable staff reductions and salary cuts. Diena's editors proposed a less painful solution (according to a blog Cita Diena/A Different Diena set up to communicate about the breakdown of the newspaper as run by them) and at one point even proposed a management buy-out of sorts. Ločmele jas told Latvian media she had found potential investors to buy back Diena from Tralmaks and Norberg, but was rebuffed. That move also sealed her fate -- it was seen as disloyal to the owners of the moment.

The situation at present is that everyone seems to be standing at a smashed trough (pie sasistas siles) to use a Latvian expression (sort of meaning that the instrument by which all of the barnyard creatures could have been fed has been foolishly destroyed). Tralmaks (now merely the CEO of the Diena group, with no ownership stake) has seen his brand value walk out the door -- indeed, he had some of the top editors escorted away by lawyers and security guards who first searched boxes and briefcases of "the departed" to see that no confidential company documents were taken.

"The Departed" have strongly hinted that they will start a new media outlet, most likely an internet portal and some kind of print publication, but with the Latvian economy collapsing, this is a daunting task, no less than the challenge of keeping the "old" Diena afloat, with Tralmaks speaking of drastic drops in advertising spending already at the time the deal was announced in July.

Finally, Jonathan Rowland, the Rowland family member apparently most involved with the investment in Latvia, has seen his admittedly risky investment turn -- very risky. Rowland appears to have been a bit of a high-roller in the past, so three years from now, he'll probably be at his club and hear something like "Good on you with that Shanghai deal, pity about that...where was it... Latvia or someplace? Odd isn't it, it was some Latvian lads who put the new roof on my country place. Great job. You know, Colin got burned for about as much on that Swedish game console thing...win some, lose some."

500 m or 8.5 % --have we a failure to communicate?

I have not been following the seemingly shambolic (tax this, no, tax that, no, tax nothing, axe nearly everything) development of the 2010 Latvian budget in great detail. But it now seems that the main problem with the international lenders (the European Union/EU, the International Monetary Fund/IMF, the Nordic countries, etc.) is that there appears to be no common definition of benchmarks. There is the absolute number of LVL 500 million (that's more than USD 1 billion for those who want it in "real money") and the other figure of an 8.5 % budget deficit as a proportion of Latvia's GDP.

One is a fixed figure, the other is changeable (not in nominal terms, but in the underlying factors). LVL 500 million is 500 million. 8.5 % is 8.5 % of a figure that has already fallen by 18 % and will probably fall again in 2010. What was USD 8.50 out of a hundred dollar bill isn't USD 8.50 out of USD 82 or maybe USD 70 further down the line.

So what is the crucial figure? In terms of keeping government borrowing down as a percentage of total GDP, it is the percentage that counts and all (most?) of the other figures adjust accordingly. This is one way that you can interpret the Latvian government's proposal to cut the budget in absolute figures by only LVL 225 million, or maybe LVL 275 million, or maybe LVL 335 million. Which is it? But forget that, the important thing is that one of the "whiches" is an amount that brings the budget deficit close to 8.5 % and, in a sum of spending cuts and revenue increases, actually adds up to, or has the same effect as 500 million. Got it?

Swedish finance minister Anders Borg didn't, nor perhaps did the EU. Borg was speaking on behalf of the EU when he chided Latvia for not cutting LVL 500 million straight up from state expenditures, punkt, slut! as the Swedes would say. But maybe the EU really didn't mean 500 million, whatever it takes, but rather, whatever gets Latvia to 8.5 % without effectively stopping the core functions of the state, including education, pensions and health care.

A long IMF country report dated August 7 but made public only a few days ago in early October doesn't paint a very hopeful picture of Latvia's ability to live up to the IMF's conditions. It uses words like "daunting", "challenging", etc., seeming to say between the lines that Latvia lacks the political will and administrative capacity to get its act together. It also hints that the country might have been better off devaluing the LVL early on, as the unbendingly strong lat is named as one of the "challenges" in several parts of the report. Anyway, to devalue at this point would merely worsen the effects of a very harsh internal devaluation (wage cuts of 30 % and more) and replace falling prices with import price inflation. If the LVL is floated, there is talk that it would be very volatile and fall between 30 and 50 %, maybe to recover close to its current theoretical but unused band of plus or minus 15% of the "fixed" rate against the euro.

With some non-Swedish foreign papers interpreting the story of Borg's alleged confidential talks with Swedish banks as "warning of Latvia's collapse", it is a wonder that there has not been any pressure on the LVL as yet (Oct 7). The Swedish Finance Minister is in the challenging position of having to speak for the EU (it is the Sweden presiding) when the EU position (500 million or 8.5 %) is a bit ambiguous, and of avoiding a situation where Latvia actually cracks and hundreds of billions of SEK (as loans by Swedish bank subsidiaries in EUR) are put at great risk or lost.

As the rather harsh dialogue between Latvia and "the Borg" (not the Star Trek hive mind, but the Swedish FM with his dual role) continues, it is obvious that the basic problem is a failure to formulate the issue, which Latvia has tried to belatedly do, arguing that it is meeting the 8.5% target and should not be beaten with the 500 million cudgel. But it may be too late, and Latvia has created an almost irrevocable image of being an unreliable, vacillating and politically disorganized partner for its international lenders.

The everyday Latvian Charlie Foxtrots* continue

Often it is not the high (low??) black comedy of Latvian politics that reminds one of how disfunctional some things are, but rather everyday occurences. Take, for example, two cases-- the bizarre waste of European Union funds in Carnikava, where my family has a summer cottage. Officially, there is a project funded by the EU Cohesion Fund to extent municipal water and sewerage to parts of the town, including some of the so-called summer cottage districts (land that was divided up for this purpose during the Soviet era and given, mainly, to people associated with the state hydrological and reclamation institutions, that is, engineers and technical staff who know something about water and sewerage systems).

As I noted in an earlier post (with video), "work" has been going on at a road crossing for several months, digging and refilling the same trench, moving and reburying pipes and culverts, keeping some kind of ancient-looking pumping machinery on site and basically totally or partly blocking access to whole communities. According to some of my summer neighbors, who know what they are talking about, the problem seems to be that whoever is doing the job cannot get one major sewer/water connection across a main road done right. Instead, the construction crew is conducting an endless series of experiments. This is not the Channel Tunnel, for f**k's sake! We are now getting close to the season when frosts and freezes are likely to ice up the water-filled trench and the mud-field surrounding it. What then? Where is the EU investigator demanding that these fuckwits explain the massive waste of funds (at least on a project level)?

Another daily WTF? is the pedestrian tunnel that has been dug, equipped and simply left empty, boarded up and fenced off at one of the busiest and nastiest crossings in Riga, between the Central Station and the Stockman/Forum Cinemas complex. There are pedestrian lights which seem to function in some random relationship to other traffic lights, leaving huge trolley-busses, busses and other traffic blocking the crosswalk or simply driving through the flow of pedestrians (this is Latvia, lights are merely suggestive). Partly to blame, apparently, is Finnish Stockmann, which promised to build a pedestrian tunnel at the same time as it built the department store and cinema multiplex, but one suspects that things may have been delayed for years because in this kind of public-private partnership, the "public" side had its hand out and the private side was expected to put something there before anything moved along.

Anyway, crossing to the department store and cinemas was a mess before any construction began, it was a worse mess while construction went on, and now little has changed while, for several weeks, there has been a finished tunnel (the workers are gone) boarded up on the Central Station side and fenced off on the Stockmann side. WTF??

There are reports in the media that the tunnel may actually open to pedestrians in the next couple of weeks, the reason for the delay being, again, as so often in Latvia, that some process has to unfuck itself over an agonizingly long time before anything happens. In this case, it is the formalities connected to delivering title to the tunnel from the builders (financed by Stockmann) to the municipality of Riga. Meanwhile, welcome to the Third World...?

*oh yes, the title contains a nice name for clusterfuck.

Valdis, Valdis, vad fan?!*

Vad fan?! (pronounced va' faahn) is a Swedish exclamation of surprise, anger and disgust in different proportions, depending on the context and connoting anything from " what the heck?" to "what the devil?" (almost literally) and even "what the fuck?!"

Vad fan?! probably sums up what Sweden's Finance Minister Anders Borg feels about the situation in Latvia, where his country's banks have billions of SEK at risk if the economy is not stabilized and some signs of recovery shown. Essential to stabilizing the Latvian budget are huge international lines of credit that have been and will be paid out only when conditions agreed upon with the international lenders -- the European Union (EU) and International Monetary Fund (IMF) are met.

So far Latvia has blatantly ignored the terms of its most recent letter of intent with the lenders and, instead of cutting LVL 500 million (more than USD 1 billion from the 2010 budget), it has cut only LVL 225 million. Pushed by the People's Party (Tautas Partija/TP) -- which signed the letter of intent promising to tax residential real estate-- Latvia has backed off from even considering some kind of tax on residential housing and expelled the only parliamentary deputy who suggested that the matter be put to a legislative vote even if the TP was against it.

Valdis Dombrovskis, Latvia's prime minister and head of a shaky coalition, now claims that "political agreement" has been reached on the less harsh 2010 budget that actually breaks with the terms of the letters of intent Latvia has signed with its creditors. In other words, there is a very good chance that Latvia will not get any more loans for the simple reason that it ignores the terms and conditions on which this money is provided.

Sweden's finance minister has understood as much and has let both Swedish banks and the media know -- directly and indirectly -- that Latvia is on its way to possible if not likely state bankruptcy and economic collapse (once there is no more money for the state budget). The Latvian government, or rather the TP, which lives on a planet of its own, is ignoring these warnings and dragging out its Alice-in-Wonderland budget process in front of the whole world (which is, unknown to the TP, the planet that they are really on).

Latvia has already established a solid reputation of unreliability and vacillation -- if not something worse, summed up by an expression that circulated after a city councillor (who was cooperating with the police) took a bribe and then didn't vote how he was bribed to vote. It is " paņēma un uzmeta" -- "took the money and fucked us." The TP and other Latvian politicians apparently believe that this way of doing things can be exported to the international arena without any consequences.

To be sure, the terms Latvia agreed to with the international lenders are incredibly harsh and leave no room for measures to stimulate the economy. As implemented by the government, the budget cuts hitherto seem to be destroying the state-funded health care system, wrecking education (teachers are paid barely above the minimum wage), demoralizing the police (with drastic salary cuts) and reducing pensioners to absolute poverty.

On the other hand, the international lenders, including the IMF, didn't fly in with a ready and non-negotiable set of requirements, more likely, with a number of goals and targets that they asked the Latvian side to make proposals for meeting and assuming that the Latvian government could actually execute on these proposals and compromises. From the outset, the EU and IMF lenders never excluded, for example, devaluation of the LVL instead of an extremely harsh "internal devaluation" by reducing wages. Latvia was unbending and chose a policy that, many would argue, has sharply cut living standards (prices of many domestic essentials would not have risen sharply if the LVL was devalued, certainly not with the same effect as a 40 % cut in income).

Instead of formulating a policy that met the needs of both sides and sticking to it, the Latvian government has engaged in a balagāns (a cheap clown show) of political in fighting and signaling the international lenders that now that you have filled the trough (with the loan tranches paid hitherto), the pigs will play with their food as they please.

Sweden's finance minister doesn't go out and (even in a confidential meeting) scare Sweden's already hypernervous banks with warnings that Latvia will collapse unless there is a lot of substance to such a forecast. It now looks like Anders Borg is probably right and Latvia's creditors must do as American children in the 1950s when the atomic air raid warning went off -- they have to duck and cover.

Valdis, Valdis, what the fuck?????

If high EU and IMF officials could write what they really thought about Latvia's political bardak*, the headline is how they might address Latvian Prime Minister Valdis Dombrovskis in a confidential e-mail. To be sure, neither the former MEP nor his party wewre involved in it, but basically, one of the coalition parties, the People's Party (Tautas Partija/TP) has opted out of the letter it signed with international lenders.
That would be bad enough -- the TP prevented a bill proposing a tax on housing from being moved into the legislative process in the national parliament, the Saeima. So instead of voting on some kind of tax on residential properties, there will be no vote or parliamentary discussion, essentially reneging on the promises made to international lenders to implement such a tax.
But there is more. The TP has expelled, without any hearing, the Saeima deputy and party member Dzintars Ābiķis, who voted against blocking the bill from the legislative process. He didn't vote for raising taxes, he didn't vote in favor of the residential housing tax, he simple voted for letting the legislature discuss, amend and put to a vote a bill drafted in an effort to comply with international lenders.
The TP has also suggested that it wants to talk to the IMF and other lenders in what very much sounds like an attempt to renegotiate a done deal, putting forth their own terms (whatever they may be). To be sure, the international lenders' terms are harsh, they allow absolutely no spending of the loaned funds for economic stimulation (that is left to EU structural funds, which Latvia has CharlieFoxtrotted** so far). And oh yes, the TP has a bit more current voter support (around 1.7 %) than Stalin would get. Just the guys to talk on behalf of the Latvian people.
And yet that is not the end of the story. The government has drafted a budget that simply doesn't cut spending by the amount agreed with international lenders (by around LVL 271 million instead of the required LVL 500 million).
So what is happening? EU and IMF honchos are soon descending on Riga to ask the headline question in person. The opinion, already widespread earlier -- that the Latvian government is a bunch of untrustworthy, capricious fuckwits-- is crystallizing even more. And that means, we may not get the next tranche of international loans no matter what anyone does. I mean, when the signature of a major coalition party amounts to goatfuck a few months later...
Where do we go then? -- probably devalue the lat, print cash (could have been done earlier to spare everyone the agony of salary cuts and firings) and buy time through the winter, possibly with Dombrovskis being pushed out of office or resigning (getting off the tracks before the train hits). After that, with the TP zoonoids in charge, you can write your own black comedy...

* Russian-derived word for total chaos, literally, a honky-tonk whorehouse in chaos
** clusterfucked

State Labor Inspectorate puts hands in the EU cookie jar

The head of Latvia's State Labor Inspectorate, Rita Elce and five other officials have been suspended pending corruption investigations by the Bureau to Prevent and Combat Corruption (KNAB in Latvian).
The Labor Inspectorate head and staff members are suspected of using European Union (EU) social and regional program funds to hire fictitious employees (apparently real persons who never worked a day at the government agency but funneled almost all of their salaries to the bank accounts of the alleged conspirators).
Elce told journalists she would cooperate with the investigation and denied that she had benefitted from the diversion of EU and other public funds.
The "fiddle" with EU funds seems to have been an internal one for the enrichment of those involved, but its alleged existence raises suspicions that the agency could have been (and still be) open to bribe-taking to cover up illegal, unsafe and unethical labor practices and the use of black and gray market labor (illegal aliens, legal residents paid in envelopes).
Events such as this indicate that the KNAB is keeping its earlier promise of "we will come for you" with regard to corrupt public servants, but it does little to diminish the image of Latvia as a state where corruption, incompetence or both are endemic to the structures of public administration.

Analysts see collapse of trust in government

The Strategic Analysis Commission (Stratēģiska analīzes komisija/SAK), a kind of think tank that has been operating under the office of the President since 2004, presented a report (Latvian language, downloads from the link page) saying that trust in government institutions was extremely low and that around half of the population would be ready to engage in violent protest.

Roberts Ķīlis, a political scientist who heads the SAK, presented its findings to an extraordinary meeting of the Cabinet of Ministers (the government) called by President Valdis Zatlers to ask for an accounting of the reform process. The meeting, broadcast live by Latvian Television, lasted more that six hours and included heated exchanges between ministers, between the President and ministers, as well as statements (and outbursts) by third parties (representatives of unions and NGOs).

The findings of the report stated, among other things:

Latvian society is dominated by unprecedentedly low trust in both the government, the parliament, and, as surveys from the summer of 2009 show, also in the entire political and party system. Even though Latvia's inhabitants have never shown significant trust in their democratic representative institutions, the spring and summer of 2009 are illustrative of a permanent crisis of confidence. In this context, it is unlikely that it is possible to regain even a part of the lost trust in a few months time, In order to renew trust in the political system, it is essential to achieve a positive dynamic in the crisis (breaking a negative vicious circle).

The report goes on to say that there will be an inevitable new wave of emigration (both for economic reasons, and to seek social and political stability). This addresses the point I have earlier made in this blog, that emigration is not only a choice in favor of higher salaries (offset by a higher cost of living and sometimes, higher taxes that emigrants don't anticipate), but also a choice of governance. Emigration is also seen as a kind of final break of any loyalty to the Latvian state and society.

The report also points out that the municipal elections did not decrease what they called "social tension" and that voters, in effect, voted for politicians and parties they deeply mistrust. This is likely to continue or worsen as the national parliamentary elections of 2010 approach

On a positive note, the report concludes that Latvians are not yet ready to trade democratic freedoms for economic security. But on the economy, the SAK forecasts that recovery will not bring wages and living standards back to 2007 levels for at least five or six years -- by 2014 or 2015. This conforms my view, and that of blogger Edward Hugh, that what Latvia faces is essentially an "L" shaped recession. While Latvia stagnates, other European economies will recover and grow, drawing away skilled labor and professionals that would be needed even to make the slow and feeble recovery forecast by the SAK. After all, what kind of a recovery is it when you catch up with 2007 in 2014. Ironically, the "seven fat years" now look like seven pounds of flesh and seven years irretrievably cut from Latvia's development.

I would say the SAK report is more evidence of the main thesis of this blog -- that Latvia is a failed state lite.

The last days/weeks of Dombrovskis the fall guy?

Valdis Dombrovskis, like the summer weather in mid-September in Latvia, is on borrowed time. It is hard not to see and hear that the knives are out for him. Both his own coalition partner, the People’s Party (Tautas partija/TP), and the loyal opposition (no ministers, but hitherto behind the government) of Latvia’s First Party/Latvian Way (Latvijas pirmā partija/Latvijas ceļš LPP/LC) are shaking the coalition so hard that pieces are sure to fly off.

The LPP/LC said at a recent party leadership conference that they would not support Dombrovskis’ government. with Riga vice-mayor Ainārs Šlesers calling for the Prime Minister to step down in so many words.

Guess who will step up?

Not even a few months had passed since the June municipal elections put the twins Nils Ušakovs (of the pro-Russian Harmony Center/Saskaņas centrs/SC) and Šlesers in charge of the Latvian capital when the “alpha twin” Šlesers started talking of taking up the call to head a government after the 2010 elections. Now, it seems, the trumpet is sounding in his ears a bit earlier.

The People’s Party has been quarreling with Dombrovskis on economy policy and accusing the government (here one must agree with Latvia’s most unpopular party in voter polls) of poor communication both within the government and with the general public. It looks like they are ready to jump as well, but hoping that the 2010 elections will boost their ratings significantly beyond the present 1.5 to 1.7 % the TP has gotten in recent polls (one thinks that given the historical ignorance of some young people plus the spin that he is actually a nice guy from Purvciems could get Vjaceslav Molotov an higher rating than the TP).

The TP wants to draft “ businessman” and ordinary rank-and-file member Andris Šķēle to make a come-back as Prime Minister (unless he trips and falls under the Bulldozer -- one of Šlesers’ municipal election symbols). Interestingly, when asked what business Šķēle had been doing on a TV talk show, Vineta Muižniece, the TP parliamentary faction leader, said that it was a private matter for Šķēle.

Certainly, whatever it is he has been doing has gotten little publicity compared to other business figures, such as Mārtiņš Bondars, ex-chairman of Latvijas Krājbanka (The Latvian Savings Bank), who have hinted at entering politics. We can read the bank’s annual reports. We can look at the track records in private business of people such as Vitālijs Gavrilovs, who ran the brewery Aldaris for many years. Other than peripheral involvement in some windpower project and alleged involvement in the failed first attempt to start digital terrestrial television, I really don’t know what Škele has been doing as a businessman these past few years. Does anyone else?

I don’t believe the “Šķēle factor” will revive the TP, which is widely and accurately blamed for its blind and deaf belief that the “fat years” would continue forever. What is more worrisome is that if fall guy Dombrovskis falls, “pedal to the metal” Šlesers may step up to the Prime Minister’s chair even ahead of the 2010 elections (it is anybody’s guess what may happen to the economy and the social fabric of the country over the next year, but it won’t be anything good). The LPP/LC, to my mind, is a cryptofascist party backed by religious fanatics who have repeatedly attempted to restrict the free speech rights of sexual minorities in Latvia. The authoritarian mind set of these people may then treat other dissidents -- such as angry spontaneous demonstrators -- no differently.

Another sign that Dombrovskis has expended his usefulness is the fact that the ink is dry on a number of critical international lending agreements and the cash is rolling into Latvia’s state coffers. There is no need to have guys hanging around whose party leadership (Dombrovskis is from the New Era/Jaunais laiks/JL) pledged in church to be committed to clean and honest government (many saw this as a balagāns/cheap show, but maybe not the Main Man up there). The international loans (and the lenders will not have armed auditors standing next to every bureaucrat) are the biggest opportunity for corruption and state capture, dwarfing the infamous G-24 credits of the early 1990s, where mere tens of millions vanished down the rathole.

Knowing what a Charlie Foxtrot (cluster f**k) the Latvian government (any Latvian government) can be, there was a substantial risk that the whole international borrowing process could have been bungled, leaving Latvia at least temporarily insolvent. Better to have had Dombrovskis and the JL guys at the wheel for that. Since it didn’t happen, we can clear the bridge and put a real pirate crew on deck now that the ship didn’t sink.

However, that doesn’t change the fact that another LVL 500 million will have to be cut from the 2010 budget in the next few weeks, with equally much coming out of the 2011 budget. So even if he gets a premature shot at the Prime Minister’s chair, Šlesers will face some real challenges as well as likely social unrest and a noticeable bleed-off of the potential workforce as economies recover in countries that Latvians can easily emigrate to.

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."

Finance Minister amazed by economic reality

The Latvian TV show Nekā personīga (Nothing Personal) showed the Minister of Finance Einārs Repše expressing surprise that total budget spending had not decreased despite sharp cuts in the basic state budget. The money, it turns out, was all being spent through the so-called social budget comprised of pension payments and unemployment benefits. The economic crisis and rising unemployment -- some of it fed by laid-off government and municipal employees -- was increasing demands on the social budget at the same time as lower wages and fewer employed are available to fund the social budget through so-called social contributions (another name for taxes).

"Surprisingly, and I was surprised by it too, our reduction in expenditure in the basic budget is almost precisely compensated by the increase in expenditure in the social budget. So the reduction and all that we have done with our combined efforts last year and this year has reduced the basic state budget, that is, the expenditures for state administration and related spending. But purely by chance, the social expenditures have grown by the same amount," Repše told the TV3 reporters.

What a surprise, especially for a Finance Minister one would expect to know a little economics! And didn't he say that that any downward spiral of tax revenues and rising social costs had been taken into account when making drastic budget cuts? So we only seem to have cut LVL 500 million and are back to square one. What else will surprise the Finance Minister next?

Teacher protests on the first day of school

Hundreds of Latvian teachers gathered in front of the Cabinet of Ministers building (The Government House) to "mourn" the degradation of Latvia education by drastic funding cuts and salary cuts. The peaceful protest came a day after several hundred demonstrators blocked bridges and roads outside Bauska, Latvia to protest the reorganization of the local hospital, eliminating, among other things, the maternity ward and most emergency services.

The Battle of Bauska -- just the start?

Several hundred people blocked two bridges in the town of Bauska, Latvia on August 31 to protest the reorganization of the local hospital and were dispersed by special riot police sent from Riga. Although emotions ran high and there was some pushing and shoving, there were no known injuries and four arrests, reportedly for public intoxication.

The action could, borrowing from Rage Against the Machine, and exaggerating somewhat, be called The Battle of Bauska, especially if it is the first taste of the social unrest that is being expected this fall. It may also have been a show of force by the government indicating that instead of dialog, it will back its hasty, seemingly chaotic and ill-explained so-called reforms and cutbacks with the riot squad where needed.

While the Bauska hospital is not being closed, it is shutting down maternity and in-patient services and reducing emergency services. Patients are being re-directed to hospitals in Jelgava, some distance away and elsewhere. This has especially distressed pregnant Bauska residents as well as those who fear the reduction of emergency assistance, not only for themselves, but for future victims of road accidents along a main north-south highway that runs through the town. It was in order to cause disruption and publicity along this main transit route that the highway and bridges were blocked in a largely spontaneous action that was guarded, but not dispersed by local police.

The health care system in Latvia is, undoubtedly, bloated and inefficient, but the present cutbacks are being made in a way that appears arbitrary and irrational, piling perceived threats of reduced health care on top on cuts in education, pensions and salaries for many public sector employees. The events in Bauska may well be precursors of more widespread socio-economic protest that may be beyond the capacity of Riga-based riot police to control.

Protests are unlikely to solve the fundamental problem -- the total destruction of trust in government/state authority and the de-facto lack of funding for a range of services, highlighted by health care. The government has largely dug its own pit (not to say grave, although there is talk of toppling the administration of Valdis Dombrovskis) by failing to explain its cutbacks and reforms and, in the case of health care, failing to prepare for a reduction in the number and functions of hospitals in Latvia. There is, for example, no nation-wide network of medical evacuation helicopters (only a few would be needed) nor is there subsidized or insurance-covered transport for patients making routine visits to hospitals and clinics from remote areas.

Latvian television (the evening news program Panorama) has posted some semi-edited raw video of the events in Bauska on YouTube.

Latvian PM--wave of emigration inevitable

Latvian Prime Minister Valdis Dombrovskis has told reporters (item in Latvian) that a wave of emigration is inescapable as European economies recover ahead of Latvia and the wage gap between Latvia and Western Europe is widened by recent sharp wage cuts.

Dombrovskis said the problem was no longer emigration, which was inescapable, but how to get migrant labor back to Latvia. While some people returned from abroad at the height of the credit-fed boom in 2007 and early 2008, I think such efforts will fail. In any case, with what I would call a "drooping L" scenario likely for the Latvian economy, the return of emigres is a problem for the late 2010s at the earliest (say, 2015 -2018 at the earliest). By drooping L, I mean a sharp drop followed by stagnation with a noticeable downward slide.

The PM has essentially confirmed (at least in general) the analysis posited by this blog and others, that the errors of earlier governments have pushed society past some tipping points and further irreversible decline is inevitable. What Dombrovskis didn't say much about was the profound destruction of trust and reliance on Latvian governance caused by the policies he has been forced to implement -- cutting funding for education, implementing de facto health care for cash only, and cutting pensions.

Welcome back, old friend --the grey economy

Taxation is theft. We tolerate it because the thief, government, uses at least some of the loot rationally and sometimes we (civil society) get a piece of it back when using a public service such as education, the police and, in a number of countries, basic health care. When the system starts to break this implied promise, or otherwise grossly disappoint or appear to deceive us, society takes spontaneous action to keep more of the wealth it creates under its own direct and, generally, radically de-centralized control.

This is not meant as some kind of libertarian economic tirade, but a forecast that in Latvia, we will very likely see a resurgence of the grey economy -- the kind where most economic activity works as it should, but as much of it as possible takes place outside the tax system.

It is important to understand that the grey economy is nothing but the everyday, legal economy with a strongly diminished or completely absent incentive to make payoffs (taxes) to the state. It is not the black economy, where many activities are malum in se (evil per se) such as knowingly selling guns to criminals, trading in goods stolen or obtained by fraud, selling the fruits of forced labor and the like. Many would include the trade in state-prohibited intoxicants in black market activities, but that is another issue.

Latvia has a history of grey market activity going back to the 1990s and beyond. It stems from Soviet times when most of the population rightly regarded the state as a totalitarian monster(the Gulags, the KGB) and/or a pathologically lying buffoon (Brezhnev, Communist ideology, promises of socialist prosperity) and did everything in their power to deny to the state or expropriate back from it the fruits of their labor. To put it concisely -- stealing from the state was a virtue. It was the only relatively safe form of resistance.

The grey market continued to evolve during the 1990s, in the general chaos of legislation and system transition. Those who had “stolen” from the state under the Communists often saw little reason or incentive to stop. Only as Latvia reformed and rationalized its tax system, as the state bureaucracy became marginally less byzantine, as accession to the European Union approached and was achieved, did the grey economy recede. With lower tax rates and an apparent “return on taxation”(schools were built, roads fixed, hospitals upgraded), there was less to gain from trying to beat the system, plus there were considerable internal costs in doing so. A bookkeeper keeping two sets of books will ask to be rewarded (on or off the books) appropriately. Concealment and evasion strategies must be formulated in addition to the management time needed to run the core business.

By the middle or the end of the 1990s, the superprofitable business of plundering Soviet-era assets for a song and selling them in foreign markets was also drawing to a close. While making 300 % profit on selling the metal from an abandoned Soviet factory (with most of the labor bartered for vodka) was an incentive to keep such transactions off the books, there was less incentive when earning 25 % from a foundry that did most of its work buying legitimate scrap and selling to export customers that did not want to look like they were buying from bandits and insisted the business at least look like it was paying taxes.

What I see happening is that the massive state budget cuts, hitting at core public services such as education, health care, public safety and pensions, will trigger another boom for the grey economy. If anyone has not caught on to this destruction of “return on taxation”, they will catch on when the government raises a whole slew of taxes (the new tax on residences, higher income and VAT taxes -- in short, whatever was dreamed up this week and may be shuffled around next week). It is time to dust off the grey market experiences of 10 years ago.

The government is very aware of what its own actions are inciting in society -- otherwise it would not be urging the State Revenue Service/VID (or what is left of it after planned massive staff cuts), regulatory bodies and the police to crack down on tax evaders and “illegal” business. Instead of becoming more service-oriented and business friendly, the VID will, if government directives are carried out, revert to its worst inquisitorial auditor/punisher face. File your quarterly papers a day late (even if the taxes they refer to were transferred on time) -- fine ‘em, fine ‘em. Misspell your company name, forget a digit of the registration number, whatever -- off with your head! Now that makes deceiving these fuckers an honest sport again!

Aside from reverting to a state of low intensity civil-war-by-deception with the tax-collecting, regulatory and repressive organs of the state, some businesses (I like to think) have other incentives for paying wages by envelope rather than paying them after tax. Business owners see that off-the-books wages have tangible social benefits, while paying the state social tax has the opposite result. Beggars still huddle on downtown streets, hospitals are closed (for whatever reason), teacher’ s salaries are cut to barely above minimum wage, no matter how much taxes and social fees are paid. When paying envelope wages, the employer knows that the money is being spent by Jānis for his sick mother, by Ieva for her child’s education, by Sergey to modestly renovate his apartment. In other words, the enterprise becomes a kind of private welfare space, spending the money denied the state in more visibly and tangibly beneficial ways. This is not to say that all envelope wages are paid with this kind of consciousness, probably in many cases, this arrangement is part of haphazard and often exploitative labor relations. But then again, back when taxes were paid, weren’t they paid to have labor law enforcers do their job?

In a very rough and often uneven way, a functioning grey economy can at least partly replace the missing “return on taxation” from the Latvian government, which has, during the blind and foolish administrations of the “fat years”, painted itself into a fiscal corner in several dimensions. Officially, the IMF and other lenders are telling it to get its act together, save billions in the next couple of years, cost what it may socially, while society and the real economy are saying -- we won’t pay! (but we will pay some of those deserving it). In effect, the collapsing public services are replaced, in an unevenly distributed way, by the funding diverted to the grey economy.

The grey economy is no replacement for a functioning modern moderate welfare state (as Latvia has tried to pass itself off as being), nor is it a rational step in consciously moving toward a night-watchman state or minarchy (which Latvia seems to be stumbling toward, whether it knows it or not). It is an improvised solution based, not on a reform of the system of governance, but is a symptom of chronically bungled and incompetent governance.

The next developments in Latvia’s economy are going to be pretty rough. European countries with labor markets accessible to Latvian citizens will recover ahead of Latvia. There will be another wave of labor emigration, numbering in the tens of thousands, in the period 2010-2013. Like their predecessors to Ireland and Great Britain in the late 1990s and the first decade of the 2000s, these Latvian economic immigrants are unlikely to ever return permanently to Latvia. Their presence, however, will generate additional repatriated funds, which will be of some limited benefit to Latvia. The Latvian economy, however, will be deprived of much of its best, brightest, most skilled and entrepreneurial labor, increasing the demographic burden on those remaining beyond the mere numbers of those emigrating. Not only warm bodies, but productivity will emigrate, and with that, there will be less value generated by the domestic Latvian economy to reallocate to pensioners and already depleted public services. As for basing an economic recovery on exports, it will be pretty hard when many of the best export producers will have “exported” themselves.

So where will those remaining behind go? Not abroad, obviously. It is a bit exaggerated to think that there will be a day when the last Latvian shuts off the lights at Riga Airport. But in terms of economic and demographic tipping points, there may well be a point at which a sufficient number of “the best and the brightest” have departed, effectively switching off the lights at the end of any tunnels.

So where will the remaining ones go? I think they are already moving into the virtual, tentative, experimental, not-as-disfunctional-as-the-official-economy space that is the burgeoning, resurrected grey economy. And I do not blame them at all.

PM denies Latvia will become a failed state

Latvian Prime Minister Valdis Dombrovskis denied Latvia was becoming a failed state in an interview (Latvian language) with the news portal Apollo. My reader Mr. Key pointed this out to me in a comment.
I don't know if Dombrovskis was referring to this blog (who knows? the man reads English) or, more likely, to a prominent Latvian political scientist's article which seems to have borrowed the title Failed State Latvija? from here.
In any case, I have always argued that Latvia was, if anything, a kind of failed state lite, with no Somalia-style dramas at street level (stoned competing militias driving around in technicals, shooting cattle for amusement, no public services whatsoever, etc.). The lights are on, public transportation runs, there is radio, TV, and if the shit going down is serious, the police will probably show up.
The reason I call Latvia a failing state or failed state lite is because the administrations prior to Dombrovskis allowed state finances and bureaucracy to bloat and private lending to run wild beyond a number of tipping points, so that most of what has happened in terms of budget cuts, international beggar-bowling, etc., was inevitable and unstoppable. Valdis Dombrovskis, the smart MEP with a cool, calm style, was the man chosen to be the fall guy for the economically lethal bungling of the administration of Aigars Kalvitis and, to some extent, Ivars Godmanis (who stayed around long enough to "save" Parex Bank and figure out that, indeed, the train of the state was runway and it was time to let someone else take the controls).
I don't know what Dombrovskis sees as a failed state. He seems to lean toward the definition that talks of a collapse of the monopoly on legitimate force. This isn't happening here, yet, but a lot else is, such as the de-facto collapse of public services and the widespread total mistrust of political power. It is, of course, a dramatic case of state failure when the population takes up arms against the police and military, but is it less a failure when folks simply ignore the alleged legitimacy of the state by ignoring it, evading taxes, dispensing rough justice and proclaiming (as in many parts of the countryside) that they see no evidence of state power or service.
It may not get widely publicized or reported, but there are probably communities kilometers down the pitted dirt road from the nearest policeman and his Soviet-clunker jeep, where drunks (and most of the population sometimes qualifies as such) who overstep certain boundaries are simply taken for a remedial walk in the woods, where what little business there is takes place as untaxed barter of goods (often alcohol) and services, and where the local school, admittedly a luxury with many teachers and staff for few pupils, will be closed with no way for children to reach the next district school, and where the district hospital will be closed as well. It is an interesting question as to whether there people abandoned the state, or the state failed them.
I can still walk about Riga safely, I can buy all necessities and (if I wanted to) a wide range of luxuries (flatscreen TVs are getting cheap, so are slightly used SUVs), but I am not at all sure that there will be anyone teaching my child at his underfunded school. I am resigned to having to pay full cost for any acceptable level of private health care (some is covered by insurance from work) and I assume that I will not be paid any reliable pension by the Latvian state. In other words, given the choice of another system of governance where these things worked, I would personally rank Latvia as failed and go there instead if and when that becomes a viable option.
In a broader sense, the scenario for Latvia is probably an L -shaped or even a drooping L scenario of stagnation for much of the next decade. One contributing factor will be that a large number of skilled and qualified workers will leave -- for all practical purposes, permanently --once EU labor markets revive. Recent TV spots about Latvians in Ireland indicate that those who have moved there --especially those making the psychologically and socially wise step (for all involved) of bring their families along -- are very unlikely to return. Even unemployed Latvians (laid off from construction work) say they are far better off and have better prospects in Ireland than they would ever have in Latvia.
Another contributing factor is that hasty cuts will collapse public services such as education and health care, leading to a decline in the skills of the younger generation and hastened mortality among the old. What impact this will have, I leave to other bloggers such as Edward Hugh, to comment on.
So I will respectfully disagree with Valdis Dombrovskis and say again -- Latvia is a kind of failed state and will continue to fail for the foreseeble future.

Dombrovskis hopes for the best after 19.6 % GDP drop

Despite a 19.6 % drop in second quarter GDP, Latvia's prime minister Valdis Dombrovskis does not believe the country is heading into a so-called L shaped recession, the portal Delfi reports (in Latvian). In an L-shaped recession, there is a sharp drop followed by prolonged stagnation.
Unfortunately, this is unwarranted optimism. The problem is not the presence or lack of stimulus (although mechanical and largely chaotic budget cuts of over LVL 1 billion are a considerable "anti-stimulus"), but one of trust in the Latvian government as an institution. This, I believe, has completely and irrevocably failed. The past governments have allowed the country to spin into a recession and crisis that is far more severe than had some preventive measures been taken over the past two or three years. The present government has irreparably broken the compulsory social contract by effectively shutting down health care and education and cutting pensions (by 70 % for working pensioners). It has raised and plans to additionally raise taxes as the tax base contracts, thereby stimulating only the gray economy.
Don't get me wrong -- there is a lot of waste in the way Latvia is governed and in the way medical and educational services are delivered, but to chop them off and toss this into the "care"of society with little warning is not a solution. The right thing to do would have been to carefully analyze (by independent third parties) the gross inefficiencies of Latvia's government and public services and to start a gradual downscaling (privatizing hospitals, but setting up a credible private/cooperative health insurance network, cutting taxes and allowing broader use of private pensions, setting up private/cooperative schools with tax reductions and deductions). I suppose it would take some 10 years to move Latvia toward a night-watchman state with minimal taxes and a core of police, judiciary and defense services. Instead, the government has announced no plan, it has broken implied social promises and it has demoralized the able, working parts of the population ensuring that, as soon as the rest of the EU starts to recover, tens of thousands of Latvians will emigrate. This will ensure the stagnation of the economy as labor skills and entrepreneurial talent go elsewhere.
I am afraid that L is where we are going.

Road monkeys in Latvia (videoblog)

I have made two R-rated (for language) videodiaries of driving in Latvia that were shot while driving to the beach at the White Dune (Baltā Kāpa) in the Pabaži district of Saulkrasti, Latvia. To be fair, driving has improved somewhat and there are reports that the number of cases of "aggressive driving" have decreased by 68 %, according to the police. Were it so...

I suggest you click through to the YouTube site to get the best viewing experience.

Latvia's GDP plummets 19.6 % in Q2 2009

Latvia's gross domestic product (GDP) plummeted by 19.6 % in the second quarter of 2009 from Q2 2008, the Central Statistics Bureau reported.
This compares to an 18 % drop in GDP in the first quarter. In seasonally-adjusted terms, the second quarter drop was 18.2 %. Hardest hit were the restaurant and hotel business down 35 %, and retailing, down 28 %. Manufacturing's contribution to GDP was down 19 %.
Prime Minister Valdis Dombrovskis believes the economy is hitting bottom. Perhaps. But the figures that suggest a year-on-year drop of at least 20 % also mean tax revenues will shrink proportionately (at least), putting more pressure on the state budget, which faces cuts of an additional LVL 500 million for 2010. There has been some optimistic speculation of a reduction in the need to cut to LVL 260 million due to expected higher tax revenues (resulting from VAT and other tax increases). However, I think tax revenues will plummet due to GDP stagnating and citizens and enterprises moving to the grey market to avoid paying higher taxes for drastically shrinking government services.
The critical moment in terms of GDP is not what happens in Latvia, but whether there will be GDP upturns sufficient to generate new demand for labor in other EU countries. If that happens, expect a wave of emigration from Latvia as tens of thousands seek jobs and better governance in Britain, Germany, Ireland, Sweden, wherever... This will further shrink the tax base and extend the stagnation of the Latvian economy -- a situation in large part caused by the mindless budgetary and credit expansion of earlier years.
Somewhat better news is that inflation dropped to 2.5 % in July. But it is a statistic of mixed blessings. Are prices lagging after falling purchasing power, which in turn, is affected by lower revenues and wage cuts in both the private and public secor, which in turn lowers revenues for retailers again, which...? You get the point?
Deflation also increases the relative weight of euro-based loan repayments in family budgets, especially as wages fall as well. Devaluation would only aggravate the problem at this stage of the game.

Latvia: A clusterf**k at all levels?

I used to think that the reason this country is disintegrating is a combination of abysmal national politics unable to deal with the effects of a global recession. Now I have seen that the rot and ineptitude go down to the local level as well. All summer (and, apparently, starting in early spring), the municipality of Carnikava, north of Riga, where my summer cottage is located, has been expanding its municipal sewerage and water network to some of the summer cottage areas. Contractors have dug up the access road to my area, dug trenches, put in some kind of pipes and then repeatedly dug up, filled in and dug up some kind of connection point at the junction of the access road and the main road. I am not a sewerage and water works engineer, but it is obvious to anyone that someone here doesn't know what the fuck they are doing. There is no such thing as installing an expensive sewerage network by trial and error and repeatedly digging trenches and pits with heavy equipment, only to fill them in and dig them up again. And Carnikava is not the only place one sees this. In Riga, several of the main streets have been repaved only to be dug up again a few weeks later because now it is not the road surface that needs renovation, now it is some subsurface system -- water, sewerage, district heating, telecoms wiring, you name it. Irrational and wasteful digging is the rule, not the exception. That goes for Carnikava.

ADDED SUNDAY AUGUST 9

While detouring around this incredible mess, I noticed that this whole thing is being financed by the European Union's (EU) so-called Cohesion Fund. Cohesion means pulling together, but instead, it looks like EU funds have been wasted by idiots keeping me and many others separated from their summer houses by huge pits, fences and mazes of pipes of no obvious purpose. Maybe the EU should investigate WTF these people have been doing for months, with no end in sight, just the "false dawn" of paving the dug-up road again as if everything was almost finished and ready to return to normalcy... NOT!

Here is my video. To see it best, click through to YouTube and watch it in HD :):

The disaster continues...

I have just returned from being in the US for just over two weeks and, due to sporadic internet access, I have been following developments in Latvia sporadically. The main events/news/rumors concern the continued collapse or hapless reduction of health services, including emergency medical care. The so called First Hospital in Riga (Pirmā Slimnīca) is being reduced to a day clinic and private medical facility, with an apparent sharp reduction in emergency medical services. So don't fall ill or have an accident in downtown Riga, which the hospital used to serve. Some 570 medical and non-medical staff are being laid off, effective almost immediately. There are now stories circulating of Latvian physicians applying for seasonal harvest work in Great Britain (through a company in the news because of dubious recruitment practices).

A couple of years ago, I was informed of a Scandinavian-based project to set up a commercial, state of the art hospital in Riga (or buy one of the existing ones) to provide offshore care to foreigners as well as paid and pro bono care for locals. This seems to have come to naught, as a foreign acquisition could be one way to "save" the First Hospital or Hospital No. 1 (a better translation?). One wonders why the government isn't putting up most of Latvia's hospitals, especially the better equipped ones, for sale rather than turning them into skeleton-staffed clinics? Is the government ineptly covering up that it is, in effect, privatizing health care? So why not do it openly and say -- we are selling our "superfluous" hospitals in an international tender. concession or whatever. In other words, allow international health care corporations to bid for these hospitals with certain conditions for providing low cost care to all citizens (or setting up private insurance schemes) rather than closing or downgrading the places as day clinics and letting (some) heart surgeons pick vegetables in Ireland?

Some of the wildest rumors claim that the hospital will be torn down to make room for a casino, a story that could have been fueled by Riga mayor Nils Ušakovs reported statement that he would like to see "a little Las Vegas" in the Latvian capital (gambling and entertainment resorts for tourists, mainly from Russia where the casino business has been shut down or exiled to the edge of the Siberian tundra).

Meanwhile, there are reports that under the still-confidential new agreement with the International Monetary Fund (IMF), Latvia may be raising its value-added tax (VAT) again to 23 %. There are very optimistic predictions that additional tax revenues from this and possibly a progressive income tax should reduce the need for budget cuts in the 2010 budget to LVL 260 million from the previous assumption that LVL 500 million would have to be cut. OK, there is a report that tax revenues in recent weeks have been trailing planned amounts by only 1 %. But I firmly believe that further VAT hikes will not increase revenues and shift transactions in certain items to the gray market. Tax evasion is a normal and, I think, morally justifiable form of resistance to an inept government that has broken the promise of rendering basic services for the taxes it extracts from the population. The government, by suddenly and seemingly irrationally (state of the art hospitals closed or downgraded, pensions cut--although Sweden has done that, too-- other services attacked with a percentage-guided axe swung in the dark) reducing the return on citizen's taxes will inevitable decrease the tax base through salary cuts, unemployment, and tax evasion. The sums to be cut from future budgets will increase, rather than decrease as government revenues spiral downward, spurred by the government's own policies.