Thursday, February 5, 2009

Baltic Countries and Bulgaria Next for Devaluation

Interesting article from BalticBusinessNews dealing with the not-so-rumore-anymore possible devaluation in the Baltic countries:

The Baltic nations and Bulgaria may be the next emerging-market countries to lose control of their currencies as the global economy worsens and eastern Europe descends into crisis, New York University professor Nouriel Roubini said to Bloomberg.

“If fundamentals are out of line you cannot maintain a fixed exchange rate, you’re going to eventually have a currency crisis,” Roubini, who forecast the U.S. recession two years ago, said in an interview from Moscow today. “The Baltics are under pressure and Bulgaria’s currency board is under pressure.”

Kazakhstan let the tenge weaken as much as 22 percent today, after keeping it stable since November by selling foreign-currency reserves. Russia’s ruble, managed against a basket of dollars and euros, has dropped 35 percent against the dollar since August, amid sliding commodity prices. The Belarusian ruble, also controlled through interventions, was devalued by 20 percent in January, while Ukraine’s hryvnia has lost 40 percent to the dollar in the past six months.

The currencies of the Baltic states of Latvia, Lithuania and Estonia have remained pegged to the euro as their economies suffer from a reduction in foreign credit and waning consumer demand. Latvia’s lats gained 0.7 percent versus the euro this year, as the central bank maintained its regime of limiting the currency’s fluctuations to 1 percent either side of 0.702804 per euro.

The Estonian kroon and Lithuania’s litas have barely moved as those countries maintain their pegs in preparation to adopt the euro. By buying and selling reserves, Estonia keeps its currency around 15.6466 per euro, while the litas is held at 3.4528 per euro. This type of fixed currency regime is often called a currency board.

Bulgaria’s lev is pegged at 1.95583 per euro. The country’s drained 16 percent of its reserves to $16.8 billion in the second half of last year, according to International Monetary Fund data.

Current-account deficits in the Baltic states and Bulgaria put the countries at risk of currency crises that may lead to problems in banking and housing, Roubini said.

“Given the economic conditions are getting worse, these pegs are under severe pressure and you have the beginning of a currency crisis,” said Roubini, who was in Moscow for a conference run by investment bank Troika Dialog. “A currency crisis becomes a banking crisis, a housing crisis, a sovereign debt crisis. It becomes a corporate crisis because each segment in these economies has a large amount of foreign liabilities.”

Latvia’s reserves fell 20 percent to $5.3 billion in the second half of last year, Estonia’s declined 5 percent to $3.9 billion and Lithuania’s slumped 13 percent to $6.3 billion.

“The large current-account deficits, fixed exchange-rate regimes and the terms of trade shocks -- emerging Europe is a recipe for disaster,” Roubini said. “The more you try to defend a peg that is unsustainable the more people attack you and the more you lose reserves.”

Roubini also said the IMF made a mistake allowing Latvia to retain its euro peg when it negotiated a bailout plan in December. The country will get 7.5 billion euros ($9.6 billion) from a group led by the Washington-based body, equivalent to about 34 percent of gross domestic product.

“The IMF made a mistake with the Latvia program of allowing them to keep the peg as it doesn’t make any sense because the currency is overvalued,” Roubini said.

The IMF “should have, like they did in East Asia and in other emerging-market crises, made it a condition of the provision of liquidity that they let the currency move,” he added. “The Baltic currencies are overvalued.”

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