Tag Archives: Latvia

Latvia: Should You Care?

In the current field of grand economic strategy, against crisis and for recovery, Latvia looms small. This is a country with just two million residents, best known recently for a huge current account deficit – the excess of imports over exports peaked out around 25 percent of GDP.  Ordinarily, there is nothing here that should move the world economy.

Yet, there are some intriguing and somewhat disconcerting signs that point towards our common future – much like a close study of Iceland, back in October 2008, told us a great deal about what was to come.

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Too Small To Fail

By now you probably know all you need to know about Too Large To Fail (Citigroup), Too Interconnected To Fail (AIG), and Too Many Potential Job Losses To Fail Before A New Administration Takes Office (GM).  Almost all the bailout cases we have seen recently were some combination of the above and they generally shared the characteristic of being large relative to the US and perhaps global financial system.  We have become accustomed to bailout increments in the hundreds of billions of dollars, and to periodically reassessing how many trillions have been committed by the Federal Reserve and others.

Today we received confirmation of something quite different: a bailout package for Latvia.  Latvia is a small country (2.2m people) and it is receiving a loan of just $2.35bn from the IMF.  The loan is obviously tiny compared with other bailouts (Citigroup received at least 10 times as much in November), but it is big in relation to Latvia’s economy – in IMF parlance, the loan is 1,200 percent (or 12x) Latvia’s quota.  Quotas are based on the size of your economy, among other things, and it used to be that 3x quota was a big loan and 5x quota really raised eyebrows.  (Iceland recently broke some records in this regard (official numbers here), and perhaps we are now in a brave new world where borrowing over 10x quota becomes more standard.)

We can scrutinize the full details of the program when it becomes public, but the press release already makes the key point quite clear,

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