Monday, July 27, 2009
IMF-latvia deal foundering
Danske Bank’s chief analyst Lars Christensen commented on the about turn:This is very bad news. Not only does this show that Dombrovskis does not really have a mandate from the different coalition parties to negotiate with the IMF, but it should also raise serious concerns within the IMF and the EC about the political situation in Latvia. Both the IMF and the EC have for a long time demanded broad political backing for the fiscal reforms. The ongoing farce about the IMF deal shows that such a consensus is nonexistent. This makes it increasingly hard for the IMF to continue negotiations — and it will probably also raise serious concerns both in Brussels and Stockholm.
pressure is continuing to build behind the euro currency pegs in eastern europe. meanwhile, via edward harrison, iceland looks to be rebounding with the help of a currency collapse.
The main point of [Ambrose Evans-Pritchard's] article is that Iceland is emerging from crisis and depression in a relatively healthy state due to a fifty percent currency devaluation. While, GDP will shrink by 7% this year in Iceland, Ireland, Latvia, Estonia and many other European countries will fare far worse. When you look at unemployment, Iceland looks good yet again.
Is this the way forward for the likes of Lithuania? Apparently not because the Baltics want into the Euro come depression or high water. In the case of Spain or Ireland, they are already in. America certainly wishes it could depreciate the currency as well. But, since its main problem on the currency front is in Asia and those currencies are mostly pegged, the U.S. couldn’t really organize a devaluation, even it wanted. Moreover, competitive currency devaluation is an outlet only for small countries – Iceland: yes, Switzerland: perhaps, America: forget about it. That would certainly trigger major retaliation.
some conclusions that might be reached:
- the depegging of these euro-periphery currencies is an eventuality, concretizing large losses for the european banking system;
euro members deprived of the avenue of currency devaluation -- including ireland but more importantly southern europe -- are faced with riding out tremendous "internal devaluations", which is to say deflationary depressions;
the united states, being unable or unwilling as yet to force a depegging of the chinese renminbi as well as seeing flight-to-safety/carry trade unwind inflows in times of instability, is also faced with a measure of internal devaluation as its currency remains strong in crisis while new fiscal stimuli properly sized to the extent of the american problem are off the table -- and this will deepen the american economic crisis even as it aids the wholesale funding crisis of the american banking complex (preserving banks like citigroup from a fate faced by parex and other latvian banks).