M*_Edgars - All Comments

Re: Q&A for M*_Edgars's Discuss request portfolio

df21084 — Thu, 19 Nov 2009 15:46:20 GMT

Can't see the portfolio. It says it's no longer being shared.

Do you have a time frame when the portfolio sharing issue is going to be resolved?

Is anyone currently able to share their portfolio, or is it just mine?

Thanks.

Dave

Re: Q&A for M*_Edgars's Discuss request portfolio

rthiru — Thu, 19 Nov 2009 15:57:56 GMT

Hi Dave

A portfolio has to be explicitly shared to all users or only favorites to be visible.

Re: Q&A for M*_Edgars's Discuss request portfolio

df21084 — Thu, 19 Nov 2009 16:04:17 GMT

rthiru:

Hi Dave

A portfolio has to be explicitly shared to all users or only favorites to be visible.

Thanks rthiru.

I asked this question because of my other thread, where I reported that I am unable to share my portfolio regardless of my selecting all or favorites.

I am awaiting M*'s response / assistance regarding this issue.

I am curious whether others are having issues sharing their portfolios.

Regards,

Dave

Re: Can Eastern Europe go bust: a story of Latvia

M*_Edgars — Mon, 20 Jul 2009 06:26:00 GMT

As I was surfing the internet on a Sunday night, I came across a good article by Nouriel Roubini, published in RGE Monitor. Here's a link for it - it is quite short, but very informative:

http://www.rgemonitor.com/roubini-monitor/257052/latvias_currency_crisis_is_a_rerun_of_argentinas

I do agree with most of his points and this is generally a very descriptive article of the situation in Latvia right now. I wish the policy-making authorities (especially the Central Bank) would read it.

Of course, the recently failed public debt auction should be a critial signal that investors do not perceive Latvia as a viable market - even at the high yields being offered the auction failed. This means that S&P will soon downgrade Latvia's debt likely even further althought the debt is rated as "junk" right now. But there is even more important point to be made: if investors refuse to buy official government debt, this is the best signal private "folks" can send to the government that they disapprove of the current "stabilization" policies (aside, of course, for elections, whcih is the ultimate machine of punishment for any elected public official). Honestly, I am not sure what the "stabilization" policies are....everyone talks about it, but I haven't heard any politician or "economist" (I mean those folks in Latvia who call themselves "economists" but have very little or none background in the subject - there is a few working even in the banking sector) talking about any specific measure.

I have never had a doubt that devaluation is the best policy path Latvia should follow. I frankly think that staying on with the fixed exchange rate regime was a mistake already in 2006 when inflation started kicking in. Of course, things got only worse when in December of 2008 the Latvian government chose not to devalue but instead pursue the path of internal devaluation which is a fancy word of cutting wages with the expectation that prices will fall. Hence people are made poorer immediately and, in fact, the goal of such a policy is nothing else but deflation which is painful for one thing, but can turn into deflationary spiral which is quite hard to get out of and is very hard to combat (think of Japan with negative interst rates on their gvt bonds). Interest rates in Latvia are still positive, which still leaves room to monetary policy. Of course, the fixed exchange rate regime prevents independent monetary policy from being enacted but that is another story.

So then should Latvia devalue? My answer is: hell yes, and the sooner the better. The best time for it is already past since the wage cuts have slowed down the economy by quite a bit and the internal devaluation has done considerable harm to the economy. Internal devaluation and "regular" devaluation are substitutes, and not complements. But unfortunately, the government chose a bad policy in the first place and it is better to admit the mistake and switch to the right path immediately as the costs of the status quo will keep raising until the country goes bankrupt and the currency falls, possibly by 50% or even more. Right now the central bank would be able to "manage" the devaluation, allowing it to be gradual. But once the government goes bankrupt, it will be rapid overnight fall in the exchange rate.....this is the story of Argentina....and possibly Latvia very soon.

Re: Can Eastern Europe go bust: a story of Latvia

M*_Edgars — Mon, 20 Jul 2009 08:51:00 GMT

I found something very entertaining (in a sad way) on the homepage of the Central Bank of Latvia. This is what the governor of the Central Bank Ilmars Rimsevics calls "argumentative" perspective on why the stability of the lat will be maintained (or at least it will be attempted, until the currency falls). The central bank has put many comments of these sorts on their homepage since January, which in itself should serve as a warning that the bank is somewhat afraid (I guess I should use the word "insecure" but that more applies to the dating scene and it is another subject) that the public will catch on and realize that, as painful as devaluation may be, it is the best solution and right now I would argue that it is unavoidable, given that the government has lost all credibility and the IMF is reluctant to disburse the scheduled loan portion. Here are the arguments. Interestingly enough, they don't appear in the English version of the site, but only Latvian - otherwise I would have copied them here but I realize that most of you don't' speak Latvian). Maybe they don't want to be laughed at by the English-speaking economists, or just didn't have time to translate.

Devaluation would cause inflation.

>> This may be true, but the Central Bank presided over inflation, which was running at 15% on average over the past two years, and the inflation was somehow "ok" then. Inflation is definitely preferable over deflation for many obvious economic reasons: we all know how to combat the former with the interest rate adjustment, but the latter is more linked to consumer confidence and it is not so clear how to combat it (the ECB is right now trying to do that, somewhat unsuccessfully). We all saw Japan trying to get rid of it over the past decade. Also, in the short run inflation may not be so harmful as it may raise production, with the manufacturers being able to raise prices for goods, demand for which is inelastic. Also, it is not so clear-cut that significant inflationary pressures would be generated by devaluing: right now the public has seen wage cuts of 50% or so. The business owners are very well aware of the fact that raising prices for elastic goods would drive away the consumers. Hence, they would likely to be willing to take the financial hit and absorb the inflation and not raise prices, at least not by the full amount of inflation. With the current deflation the situation is not much different: people are buying less because they simply don't have enough money in their wallets or bank accounts. It is a paradox but in the current situation deflation and inflation would have quite similar short run effects on the economy. In the long run, deflation would prove much harder to get rid of. We know how to deal with inflation (lately I am not convinced that the central bank does, but that is another story), but deflation is like the dark corner in an old haunted house where no one wants to go. I would suggest that the bank stays out of it as well if it's not too late already.

Prices hikes for imported goods, energy resources.

>> This seems to be the cornerstone of the bank's arguments although it is not well-reasoned at all. There are two points in order: if the raw materials are for re-export, then to me it does not seem to matter what price is paid for them. The exports will go out at the same price (the world price - Latvia is a price-taker and cannot dictate what price it pays for the raw materials or export products, it's not OPEC) plus any added value. In this sense, the devaluation does not really matter. Similar point is made by Edward Hughes in his blog "Latvian Economy Watch". Of course, if Latvia wants cheap raw materials, that is a problem. The country has to pay for its imports with exports, that is a simple truth. If you want cheap imports for domestic consumption, you cannot get rid of the current account deficit, which is one reason no one wants to lend to Latvia and we saw the public debt auction failing recently. Also, price hikes for some imported goods may not be such a bad thing as it would make domestically produced goods cheaper relative to the imports. I realize that this is somewhat of a protectionist argument, but it is exactly what Latvia needs right now. The bank concludes that the benefits to the exporters would be short-run or non-existent because of the price hikes in raw materials. I find this utter nonsense as it would exactly have an impact in the long run. In the short run the exchange rate will overshoot and, as prices are "sticky", it will take some time for the goods market to reach equilibrium. This is the good old Dornbusch Overshooting Model. In the long-run is where the exports will see the biggest gains, although the currency is so overvalued that even short run would present satisfactory results. Another point to make is that other countries which have similar export commodities to Latvia, such as Hungary, Czech Republic and Poland, have devalued because they have floating exchange rate regimes. Thus, our exports are now even more expensive compared to their stuff. Think about it: why should I buy from Latvia, if I can buy it cheaper from Poland or Hungary? This is the benefit of a floating exchange rate regime because right now Latvia is losing any competitive edge against its neighbors just because they enjoy the adjustments in floating exchange rate regime brings. As the export markets pick up in the second half of 2009, it will become more obvious.

The general welfare would further decline because the value of savings in lats would decline.

>> This was the funniest argument of all, I think. At first I thought, "are you f*****g kidding me? I would not have enough imagination to forward such a nonsense economic argument. Yes, it is logically true but it does not hold any economic validity. Why? I can go to the bank tomorrow and exchange my lats for EUR or USD.....and then, in fact, I would benefit from devaluation as I would be "the rich guy in town" with EUR or USD in my pocket and could buy drinks for every girl in a local club. And, to be honest, right now not many Latvians have substantial savings in any currency. And, the wages cuts or so-called internal devaluation has driven savings down even further. Of course, the bank would want to prevent everybody exchanging lats for some foreign currency as it would be a classical "attack on the central bank" and would self fulfill the devaluation fears. When the bank runs out of foreign currency to exchange lats for...the game is over and the lat falls since there is no more foreign reserves to make interventions in the market in order to hold the rate as it stands today. Simple, but very realistic - exactly what happened to Argentina and many other governments who have said that they will not devalue.

The burden of borrowers would increase as 80% of the loans to households are in EUR.

>> This is true, but this situation is unavoidable. The households are hurt right now because their wages have been cut and hence they are able to purchase less EUR in order to make the loan payments. The default rate is on the rise and more is still to come as the wages enjoy further downward pressure. Of course, the bank forgets to mention this little detail. In fact, the devaluation, whether internal or external (in the traditional sense of the word) will reduce the ability of the households to make the loan payments. The central bank itself is largely responsible for this as it, in fact, encouraged the citizens to borrow in EUR speculating that Latvia will join the Eurozone in 2008 and the interest rates in Eurozone were lower which encouraged many to take advantage of this. We all know that the borrowing in foreign currency, while you are paid in a domestic one, entails substantial foreign exchange risks which, in retrospect, were understated. Part of the fault lies in the central bank, but part of it lies in the hands of the borrowers themselves. If you cannot afford a house, then you probably should not buy one (or a BMW, or anything for that matter). I will not go into details about this since the logic is very similar to the mortgage crisis in the US and we all have heard these arguments over and over. The point is that the borrowers should take some blame for their risky behavior. However, this presents also an opportunity: renegotiate the loan terms on a broader scale with the Scandinavian banks. As unbelievable as it sounds, the lenders are not interested in going bankrupt and the Latvian government frankly has substantial negotiating power here - buy off the loans from the commercial banks at a discount and hence reduce the burden on the public. The Scandinavian banks are afraid of the devaluation and the government is passing a great opportunity to save its citizens from massive bankruptcies without hurting the relationships with Scandinavian partners. After that, the citizens would be able to pay back to the government which now would own the loans at terms specified thereafter. This, frankly, would be the best step that the government could take, regardless whether devaluation occurs or not. "The Economist" has suggested a while back in February or so (I cannot find the exact issue right now), but it fell on deaf ears. It has been and still remains the most sensible public policy option to consider.

The trust in lat (local currency) would collapse both domestically and abroad.

>> This is again sort of a joke, in my opinion. Does anyone abroad have trust in lat? Frankly, I don't think so. The speculations about devaluation have been ongoing since probably November 2008 and I fail to see how in such an environment, when the IMF refuses to further fund Latvia, any confidence in lat may exist. If I was living in Latvia, I would no longer hold any lats as my trust in this currency is long gone. The best signal for this is the increasing interventions in the foreign exchange market the central bank had to make. RIGIBOR (the interbank lending rate) has been shooting up and was at 19.4% for 12 month period and 2.08% for overnight borrowing (!!!) as of June 17^th, 2009. I got it from the official website of the central bank www.bank.lv This situation is logical since the central bank is removing lats from the circulation in order to keep the currency peg. Here is another paradox: this raises the costs of borrowing for businesses in lats and further deteriorates the competitiveness of Latvian entrepreneurs. Keep in mind: on top of this, they are scared of borrowing in EUR because of the devaluation risks although the interest rate on EUR is much lower. This is another way how the fixed exchange rate regime hurts the businesses, which has not gotten enough attention from the media and even economists. This arguably will drive many business bankrupt.

These all are the so-called "arguments" against devaluation. I find it entertaining that the central bank cannot produce any numerical arguments against it -they all are statements, and, as we have seen, they don't hold well against critique. If nothing changes in the policy course, we can expect devaluation around Christmas time or even earlier if the IMF refuses funding. Of course, this is my speculation but devaluation is unavoidable at this point.

Re: Can Eastern Europe go bust: a story of Latvia

M*_Edgars — Mon, 20 Jul 2009 17:07:00 GMT

It's the morning of July 20th and Swedish bank Skandinaviska Enskilda Banken (SEB) reported its quarterly financials today. There is nothing particulary surprising about it, but I still feel like it's important to point out the impact of the ailing Baltic region, particulary Latvia, on this cornerstone Skandinavian bank.

The bank group reported a net loss of $24.8 million (193 million Swedish kronor) for the 2nd quarter. This is largely due to loans in Baltic countries. Credit provisions, a.k.a., charges to cover customers who are unable to make their payments, jumped by 697%, from 448 million kronor to 3.57 billion kronor, compared to the same time period a year ago

2.64 billion kronor of these provisions are due to the Baltic states - most notably Latvia and Lithuania. That comes to 74% of the total charges. I would guess that the majority of this 2.64 billion kronor were due to the Latvian borrowers but this is just a speculation, and I could not find any such credible data anywhere.

The Swedish bank said these charges are "one time" but I am somewhat skeptical about this. As the economy deteriorates in Baltics and particulary in Latvia, new charge-offs may emerge as the reality will likely be much darker than the forecasts seem to suggest. No wonder the shares the SEB shares fell 2.64% early Monday. Of course, the SEB has an incentive to paint a rosy picture as the shareholds sure don't want the sharepirce to drop even further.

Why this all matters? As I said before, this is a great opportunity for the Latvian government to repurchase the loans held by its citizens at a considerable discount - the SEB wants certainty in this risky environment and such a purchase would guarantee that the loans will bring at least a few cents on dollar, rather than nothing, as it may turn out. The question is just how bad the situation is....if devaluation occurs right now on top of the "international devaluation" or wage cuts, then it will be a disaster and mass defaults would occur. Hence, if the Latvian government would start to consider devaluation seriously, that would send the SEB shares even further down and the expected value of the loans held in Baltics would tank.....to me, that sounds like a great opportunity to buy. Thus, the Latvian authorities actually hold an important weapon called "devaluation". Then don't even realize how much potential power it holds....and this is the best way to protect its citizens from a decade of poverty just trying to pay off the loans.

On top of this, the government actually has infrastructure to do this - it owns two large banks: "Latvian Mortgage Bank" and "Parex", which it saved late last year from insolvency. Hence, the transfer of the ownership of the loans would be quite easy and no need for a new special institution overseeing this would emerge.

Re: Can Eastern Europe go bust: a story of Latvia

M*_Edgars — Tue, 21 Jul 2009 04:06:29 GMT

It is the evening of July 20th and there is an update on the loan package to Latvia. IMF has not released anything yet, but here's the updated Supplemental Memorandum of Understanding from the European Commission (EC):

ec.europa.eu/.../publication15674_en.pdf

It is very odd-looking document - it looks like the PDF version was prepared in a hurry and there are even some notes on the side. Oh well, it is published on the EC homepage and I am not going to be the one questioning the abilities of the EC secretaries to scan documents properly. Maybe they were using a Mac, I don't know.

Aside from that, things look increasingly bleak for Latvia since the document does not include any single measure on how to get the country out of recession. The basic premise is this: cut spending and hike takes, probably as far off from the economic realities as it can get.

Some points, which will be hard to digest for the most socially vulnerable classes, include measures such as increasing VAT from 21% to 23%, reducing non-taxable personal income threshold from 90 LVL to 45 LVL, reducing family benefits (the document includes a long list of these) and introducing the residential real estate tax.

On top of all this, it includes somewhat complicated reporting requirements. The EC even is interested in seeing local muncipal budgets and their expenditures. I mean, it just seems to get out of hand. As much as I understand that the lender sets the terms for any loan, these conditions start to seriously raise questions about national sovereignty - Edward Hugh in his blog even mentions that Latvia for the first time in 19 years, since it regained the independence in 1990, has at least temporarily ceased to exist de facto as a sovereign state. Frankly, I don't diasgree...