Banks Brace for Latvia's Collapse

The media is full of great news today!

First, The Independent reported that China, Russia, and the Arab states are planning to quit the dollar for oil trading (which would be a huge blow to U.S. economic hegemony). Now The Telegraph is jumping into the fray with another scary headline, Banks Brace for Latvia's Collapse.

See below for highlights...

The Svenska Dagbladet newspaper said Sweden's finance minister Anders Borg had told banks secretly that Latvia's political order was unravelling, advising them to prepare for the collapse of Latvia's rescue talks.

Latvia has failed to deliver draconian spending cuts agreed to secure the next tranche of its €7.5bn (£6.85bn) bail-out from the EU, the International Monetary Fund, and Sweden, balking at 20pc cuts in pensions and a further 15pc cut in public wages.

The People's Party, the largest group in the coalition, voted against austerity measures last month, raising concerns that the country is ungovernable…

Latvia's economy contracted by 18.2pc in the twelve months to June, trumped only by Lithuania at 20.4pc… Youth unemployment in Latvia is already 31pc, and concentrated among ethnic Russians…

Latvia is "more likely than not" to devalue, toppling pegs in Estonia and Lithuania. "Financial markets elsewhere in the region are likely to be hit by contagion, with Hungary, Romania, and Ukraine most vulnerable"…

The Baltic trio financed property booms in euros (and swiss francs) because rates were lower. It was taken for granted that eventual euro entry had eliminated the exchange risk. This has become a trap. They need to devalue to break the cycle of depression, but cannot do so because of euro mortgages. Instead they hope to claw back lost competitiveness through wage deflation. This takes years, and discipline.

Mr. Shearing said Latvia's economy would shrink by 30pc whether it devalues or not.