Swedish paper pulls a mindf**k on the Latvian media

Sweden's Dagens Nyheter has pulled off a successful mindfuck on the Latvian media, thanks to me, actually. The paper ran what appeared to be a letter to the Swedish prime minister Fredrik Reinfelt (Moderate Party) from the leaders of his three coalition partners. It raised very credible points, including Finance Minister Anders Borg's scolding of Latvia for failing to cut 500 million LVL from its budget.
The letter was written in a very Swedish informal style -- Dear Fredrik, etc. and signed with first names. This made it even more believable that it was not a fake opinion article, but most likely a leaked letter. The signature of Peter Wolodarski, one of the editorial page writers, lent credibility to this version. OK, it was Sunday afternoon, I was not at the office, I was surfing the Swedish press, so I wrote it up. But it was not fucking April 1, when you are on the lookout for such stuff.
OK, the squareheads* got me on this one, gotta write a correction on the LETA wire....

*a bizarre name for Swedes I heard in an American cowboy movie, where one referred to a Swedish prarie settlement as a place "with nothin' but squareheads living there". :)

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.

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.

Swedes, not Latvians may get Latvian medical care

Just days after Latvia cut off funding for so-called endoprosthetic operations (hip, knee and other joint replacements), the new Minister of Health Baiba Rozentāle said Latvia could offer surgical and medical services to Sweden in order to reduce queues for elective or planned surgery. Rozentāle said in an interview with the Latvian daily Diena that selling medical services to Sweden would be one way to increase revenues for the Latvian health care system

If implemented, the scheme would mean that Swedes, who are entitled to elective surgery such as hip replacements, could get the surgery done more quickly in Latvia and financed by Sweden's national health service, while Latvians with identical medical conditions would one have private care available. In many cases this would mean that poor, older Latvians would go untreated and, in some cases, end their lives bedridden rather than mobile and healthy after a joint replacement.

The bizarre aspect here is that one would see Sweden's publicly financed medicine become slightly more efficient by buying services in Latvia, while Latvia's once public-financed medical care is essentially being dismantled by budget cuts, leaving local patients with no alternative but medical care paid out of pocket.

In any other context, the export of medical services would be laudable, but it is more than ironic that Latvia hopes to earn money by replacing Swedish hips while cutting funds and allowing its own citizens and residents who cannot afford private operations to spend the rest of their lives as invalids.

Latvia will devalue-- Swedish press

The Swedish business newspaper Dagens Industri reports that a devaluation of the Latvian lat is drawing ever closer and that the Swedish central bank, Sveriges Riksbank was borrowing 100 billion SEK to bolster its foreign currency reserves ahead of the likely move by the Latvian central bank, which would probably be followed by devaluations in Estonia and Lithuania.
Latvia's central bank governor gave a bizarre hint at a devaluation by saying that if Latvia didn't get international loans, it would have to issue some kind of scrip (taloni--literally, coupons) instead of paying salaries to public sector employees. This would effectively be a second currency with which to buy food and pay rent and would undermine the current legal tender, the lat.
According to Dagens Industri, a devaluation would hit hardest at Swedbank, which has SEK 217 billion in lending to Baltic borrowers, most of it in the form of euro-based loans. The level of distressed debt has been rising even without a devaluation (or because of the domestic devaluation due to drastic salary cuts). The newspaper says Swedbank may have to raise at least SEK 10 billion in new capital. Both Swedbank and SEB (Baltic exposure SEK 186 billion) share fell on the Stockholm Stock Exchange, but SEB is seen as sufficiently capitalized for the moment.
A devaluation in the near future will effectively subject Latvia to the worst of both worlds -- wage cuts and mass unemployment that have slashed purchasing power to the minimum, and a further cut in living standards when the inflationary effects of a devaluation are passed along.