What if they held a bond auction and nobody came?
This is exactly what happened in Latvia a few weeks ago, as the country failed to receive a single bid for $16 million of debt, maturing in April 2010. In other words, investors were not willing to loan what amounts to international finance pocket change to a sovereign government for a measly 6-months.
Why? Because everyone expects that Latvia will devalue its currency; consequently, no one wants to be holding on to local assets there because the value of those assets will drop like rock once the Latvian government finally faces the music and devalues.
I talked about this in July “You Can profit from this countrys Devaluation ” after spending a great deal of time in the Baltics. Latvia’s currency, the lat, is pegged to the euro at very high rate– the agreement was made in 2004 when Latvia’s economy was growing very rapidly. At the time, the peg seemed reasonable.
Today, Latvia’s economy is collapsing 17% per year, and the central bank is running out of funds to intercede in the market. In order to maintain the peg, Latvia’s central bank has to buy lats and sell euro, essentially creating artificial demand for the lat. It can only do this for so long before it runs out of euro.
For months, it has been getting euro loans from rich European countries and supranational central banks. Each of these loans has been burned through as Latvia desperately tries to keep the peg alive. For the euro lenders, this is akin to buying bonds in GM… it’s a lost cause, and any new money you throw at it will surely be lost.
European governments have sternly warned politicians in Latvia that severe austerity measures had better be implemented if they want more loan money. Realistically, though, Latvia would have to eliminate entire divisions of its government and economy in order to meet the EU’s budget demands.
This is not likely to happen. Consequently, devaluation is looking more and more like the only remaining option.
The greatest fear of devaluation in Latvia is that locals who took out mortgages denominated in foreign currencies (because the interest rates were lower) would suddenly owe a hell of a lot more on the balance after devaluation. Read More…
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