Greek-style Austerity Measures

If You Want to Know What Happens When the IMF Come in, Look at Latvia

When Latvia's credit-fuelled property bubble burst, the country got outside help. The result was both hardship and signs of recovery, writes Political Correspondent Conor McMorrow

November 14, 2010

Irish Tribune - In December 2008, the Latvian government was forced to seek an IMF bailout when it could not raise short-term funds. The payback, however, was immense. If Ireland needs similar help, stringent cuts across the board would be inevitable.

Last week, the Sunday Tribune spoke to a number of Latvian journalists about that bailout and how it has affected their country over the past two years.

Known as the 'Baltic Tiger', Latvia's economy grew by 50% between 2004 and 2007. Not unlike Ireland, much of the country's growth was generated by a credit-fuelled property bubble.

Paul Raudseps, economics editor of the Latvian weekly news magazine Ir, recalled:

"We had a huge real estate bubble and we were importing more and exporting less. We were borrowing to pay for that deficit and then the global financial crisis hit."

Unlike Ireland, where we have had an across-the-board banking crisis, only one of Latvia's banks, Parex, had to be rescued by the state. The government initially took a 51% stake in the bank before it nationalised it, pouring taxpayers' money into it.

The rest of the country's main banks are Swedish-owned and as a result of Scandinavian banks managing to pull through the global crisis, Latvia was spared a full-scale banking crisis.

The Baltic Tiger breathed its last in a similar manner to the Celtic Tiger. The Latvian economy had peaked in 2007 and the government was already worried about declining tax receipts when the global financial crisis hit towards the end of 2008.

Raudseps explained that 10% of Latvia's GDP was poured into the failed Parex bank and by November 2008, the crisis hit breaking point. The Latvian government was no longer able to borrow money on the bond markets so it was forced to call on a joint EU/IMF financial bailout.

"The total package was €7.5bn. About half of that was put up by the EU Commission, with a further 20-25% from the IMF and the rest was made of bilateral loans," said Raudsepps.

"Overall, the contraction in the economy from its peak in 2008 to the bottom in 2009 was just a little less than 25% of GDP. The government that was in office at the time the EU/IMF deal was done signed an agreement in December 2008 which foresaw a 5% contraction in 2009 but the contraction in that year was actually 18%."

The IMF has become the bogeyman in Irish politics. Any mention of its arrival has been met with commentary about the level of reputational damage it would do to a country that fought so hard for its political and economic sovereignty. So what has the bogeyman actually done to Latvia?

Nathan Greenhalgh is the editor-in-chief of the Baltic Reports news website and he explained that,

"The IMF has primarily insisted that Latvia continue with deep cuts to meet agreed-upon GDP deficit percentages. It's been a bit of good cop, bad cop with the World Bank praising Latvia's resolve to cut while the IMF insists it isn't doing enough and must cut more.

"The IMF has insisted on cuts, cuts, cuts and it has also pressed Latvia to reform its pension scheme which is unsustainable at current levels."

In the last two years, the austerity measures in Latvia's budgets have seen massive cuts in the health and education sectors. The number of hospitals has been cut from 59 to 42 and 58 schools have been closed down.

Daiga Grube, of the LETA news agency, believes the IMF intervention has focused mostly on guiding Latvia's fiscal policies.

"Pressure from the IMF to consolidate the state's budget helped our politicians to take very hard steps, but we can't be 100% sure that these steps were the best solution for society in general," she said.

On a positive note, Grube said the IMF has saved the Latvian state from bankruptcy and it has been able to keep functioning by continuing to pay pensions, salaries and social welfare payments.

While the IMF bailout has not affected the country's ranking in the World Bank's 'Ease of Doing Business' survey, it has affected investment. According to Latvia's Central Statistics Bureau, the inflow of foreign direct investment, which fuelled the post-Soviet country's growth during the Baltic Tiger boom years, has taken a massive hit and shows little sign of recovering, especially as domestic demand remains in the doldrums.

Since the crisis hit, neighbour Lithuania has managed to attract IBM, Barclay's and Western Union to locate there while Estonia expects an influx of investment after it switches to the euro in January. Latvia has not experienced any such investment in the last two years as cutting the budget deficit has taken priority over everything else on the political and economic agenda.

The unemployment rate tripled, hitting a peak of 22% in January before it fell back to 16% in June.

In March 2009, Valdis Dombrovskis left his role as an MEP in Brussels and returned home as prime minister.

Since, then Dombrovskis has pushed through some of the most draconian measures in Europe to rescue Latvia from bankruptcy. There have been salary cuts of up to 30% across the public sector, income tax has been increased from 23% to 26%, Vat from 18% to 21%, the number of state agencies has been halved from 76 to 39 and there have been further tax increases on alcohol, cars and property.

Despite the initial widespread anger about his austerity measures, Dombrovskis has succeeded in convincing the Latvian people that his fiscal policies represent the best chance for the country to restore its financial stability. His centre-right coalition was re-elected comfortably in elections last month.

Journalist Paul Raudsepps remembers everyone in Latvia being depressed after the austerity measures took hold in the spring of 2009. But he added:

"In general, after almost two years, Latvian people have shown they are tough and they can take the pain. The results of the election kind of show that. It is pretty amazing that the government got re-elected after all the cuts.

"If you come to Riga it does not look like a place where there has been a 25% decrease in GDP."

For Latvia, the last two years have been among the worst of times. But the country has survived.

Following the death of the Celtic Tiger, all we can do is take solace from the way Latvia has mourned the passing of the Baltic Tiger.

The EU-IMF Humiliates Ireland

November 17, 2010

EU Observer - I am not a fan of Brian Cowen (who is?) but anyone with a heart had to feel some pity for the man this morning.

The Irish PM was in his country’s parliament (a body that is self-evidently no longer a sovereign people’s assembly) insisting there was no bailout.

“There has been no dictation from anybody. What we’re involved in here is working with colleagues in respect of currency problems and euro issue problems that are affecting Ireland, they’re affecting other countries. They’re particularly affecting Ireland at the moment,” he mumbled. “There has been no question, as has been stated all over the weekend, of a negotiation for a bailout.”

Oh yeah?

Christine Lagarde, the French finance minister seems to know something poor old Biffo doesn’t – is Ireland’s leader (and people) the last to know?

“Is it six months or a few days away? I’d say it’s closer to days,” she said of a bailout.

Didier Reynders, the Belgian finance minister, joked that the basics of EU bailout had been agreed, despite there being no request for help from the Irish.

“Now we have the answer, we are just waiting for the question,” he quipped.

Enda Kenny, the Fine Gael opposition leader, was all over it as the EU-IMF teams booked their flights to Dublin to take over the finance ministry on Thursday. The officials are known as “the Germans” by their resentful Irish inferiors, I’m told.

“The white flag has been raised. The towel has been thrown in and like the prowler waves of the west coast they’re coming on Thursday. And they’re not coming in here to say ‘well done Brian, well done lads, keep at it, you’re doing a great job’,” he said.

EU and IMF officials will be carrying out “intensified, short and focused” preparations for a bailout of Ireland. Ireland’s four year austerity budget has been delayed so the EU-IMF can check it line by line.

The final insult may be a bi-lateral offer from Britain – meaning that the EU-IMF and HMG (Her Majesty’s Government) will be in charge.

Was this crisis caused by markets? Some of it was but the turmoil was also deliberately whipped up by people including Herman Van Rompuy (it’s a “survival crisis” apparently) and the ECB. To its credit the European Commission seems to have refused to play that dangerous game.

The EU and G20 strategy to preserve financial institutions, banks, at all costs has destroyed Irish sovereignty.

Watching Cowen humiliated, in an Irish parliament that has been sidelined as much as he has, one has to ask: Just as national protectionism was a disaster in the 1930s, can we be so sure that the EU-IMF-G20 is what we need today?