A final note on Latvia today before I put the Baltics to bed for now–
Yesterday I argued that Latvia is definitely headed for devaluation, and that European governments are practically bending over backwards to make sure we know about it.
In comments yesterday, the astute Mr. Marriott pointed out that the grey economy is now flourishing in Latvia; this is undeniably true, and we see evidence of dark economies around the world in times of crisis. Argentina and Cuba are great examples.
But I would submit that the grey economy is even more reason for the devaluation– tax revenues become even lighter as dark economies grow, while the government’s fiscal burden remains heavy.
So how specifically do we profit from this?
One thing’s for sure, I am NOT going to short the Lat… Rado correctly pointed out yesterday that we will get eaten alive by the interest rate: the Latvian Central Bank is quoting the 3-month Lat rate at 35%, and that is not a type-o.
Hey, we might be right about the devaluation, but we could get killed waiting around for it to happen at 35%.
I agree with Dean and ‘Me’ that the safer tactic is to short Sweden.
Sweden’s banks dominate the Baltic banking scene; two in particular, SEB and Swedbank, are like cockroaches in Riga– they have branches everywhere and are about to get squashed.
In total, Swedish banks have roughly $75 billion of exposure to Latvia’s economy, roughly 25% of Sweden’s GDP. Devaluation of the Lat will have multiple effects on these banks’ balance sheets:
First, the banks will take an immediate hit to their equity as the book value of their Latvian holdings will become worth far less in Swedish kronor terms. Roughly 30% of Swedbank’s equity, for example, is based in the Baltics, and this will see an instant drop.
Second, the loan default rate in Lativa is going to skyrocket. Most loans are denominated in euro or Swedish kronor because the interest rates were lower; when Latvia devalues, borrowers will no longer be able to afford the foreign currency payment.
This will result in another hit to the banks’ equity as their loan assets evaporate and are replaced by a portfolio of worthless foreclosures and bankrupt companies.
Third, with such an intense reduction in Baltic economic activity, the banks will suffer another earnings decline. Baltic banking comprised 30% of Swedbank’s operating profit last year, and that profit will now certainly swing negative.
Fourth, after suffering a huge drop in equity and profitability, Sweden’s banks will likely be under pressure to raise cash, either from the government or in capital markets. These types of rights offerings, like the one SEB recently completed, will be highly dilutive to shareholders.
In short (ha), shorting Sweden’s banks with heavy Baltic exposure, either directly or through PUT options, is one way of profiting from Latvia’s devaluation.
One more thing I’d like to mention, completely off-topic.
A couple of you have asked about entrepreneurial ventures and Internet business opportunities. As an investor/entrepreneur myself, I believe wholeheartedly that the Internet provides a wealth of opportunity to earn money and live anywhere.
I’ve been fortunate to meet with and be educated by some of the industry’s sharpest entrepreneurs, mostly at small, private conferences held by insiders.
My friend and partner Matt, one of the industry’s more brilliant minds, knows the participants well and has been able to talk me in several times.
One such conference is coming up in Atlanta on August 6th… it’s short notice, but I’m going to try like hell to make it, and Matt will definitely be there– along with some top internet entrepreneurs. It should be a great networking and educational event, but the big draw for me will be racing.
The organizer is putting everyone through the Skip Barber Auto Racing school, and as a car lover, I really enjoy that sort of thing. There’s only 15 spots left– take a look if you’re interested.
Also, if you decide to go, make sure you drop me a line to let me know, I will try to organize an informal get together.