Investment Dealers’ Digest
October 20, 2008
Latvia, the size of West Virginia, is one of three Baltic states that achieved its independence with the fall of the Soviet Union in the early 1990s. Like the Federal Reserve, the Bank of Latvia implements monetary policy, regulates the amount of money in circulation in order to maintain price stability in the Baltic nation. In May 2004 Latvia joined the European Union and, as a result, the Bank of Latvia became a member of the European Central Bank.
Last week, IDD (Investment Dealers’ Digest) sat down with Ilmars Rimsevics, the governor of Latvia’s central bank. Following are excerpts of that conversation.
IDD: How has the global credit crisis impacted the Baltic states, specifically Latvia?
Rimsevics: I think we will see some bounces back and forth, here and there, but I believe the markets should calm. This subprime crisis and all of the things which we saw developing lately have had some impact indirectly because, of course, today’s globalized world is very interconnected. We could see that even though we have nothing to do with that, our [parent] banks which are mostly residing in Sweden, Norway and Finland, remotely had some connections with Lehman Brothers, with Bear Stearns, Merrill Lynch, AIG. [They] had some investments and these small investments–I would say tiny investments–were perceived as large and as a sign of vulnerability, which immediately was echoed into the Baltic states. People said if your parents are weak and they might lose some capital so will you. We were dealing with secondary effects and we are glad this is over. We see the nervousness and the atmosphere and the environment for rumors is disappearing and we will continue business as usual. I hope all the financial flows and money flows will be revived in the next few weeks and that people have also managed to distinguish between Iceland and the Baltic states. I find it shocking that people are not paying attention … or [are] not willing to study the differences between the Southeast Asia crisis, Argentina, South Korea and Iceland vis-a-vis the Baltic states, where 85% or 95% of the banks are owned by the Scandinavian banks and financial flows are much more certain and much more stable.
IDD: Have you had people second-guessing your economy or economic policy? How do you counter rumors?
Rimsevics: Yes indeed. I think it is needless to say rumors today are doing the biggest damage. In 2007, we successfully were explaining the difference between other countries in financial markets which have failed and Latvia. That allowed us to come back. We saw how some of the institutions–due to the rumors and short sales–were forced to get out of business in the US. We hope therefore that people have learned that the Latvian financial market is sound and stable. Our economic indicators even have improved since last year’s spring quite substantially. We are going into a much more stable and much more transparent environment now.
IDD: Last spring, were people shorting the Latvian currency, the Lats?
Rimsevics: Yes. They were thinking our current account would get bigger, inflation would get bigger, that foreign funding could decrease, that the government will be conducting irresponsible fiscal policy. They thought this was the right time to speculate against [the Lats]. I am very glad the speculators have burned their fingers. They have lost a lot of money. The Latvian government has demonstrated commitment to keeping a strong fiscal policy. Inflation has come down from very high numbers of 17% down to 14% and we’re hoping to finish the year with close to a single-digit number. We have demonstrated that our financial stability and soundness is much bigger than it could be perceived without thorough analysis.
IDD: When you defended the Lats, did you do this in conjunction with other central banks in Europe?
Rimsevics: No, we did it on our own. There was no need for any other institutions to be involved. Our commercial banking sector was also quite a big help. Their knowing the situation locally also helped defend the Lats.
IDD: Is there a program to routinely issue Latvian government debt and are you looking to expand or broaden the underwriters of that debt?
Rimsevics: Latvia has been very conservative. We have not been borrowing very much. This year’s budget has also been in balance. This is also one of the biggest stabilizers for Latvia. There have been moments where we issue the debt just to keep our bonds in the market to have a benchmark for future borrowings. We have been following the financial markets [and] I must confess it is interesting that even CDS [credit default swaps] have been rating Latvia as a potentially risky country when it comes to actual borrowing. We have managed to borrow at maybe 80 or 100 basis points above Libor.
IDD: What do you take away from the Iceland situation? When you look at Iceland do you say to yourself, “I have to do something more or I have to do something differently as a central banker?”
Rimsevics: I would say it is very difficult to do more than Iceland did. Iceland did a lot of things correctly. I find Iceland is a pure victim of rumors and very reckless attacks by the speculators. If you keep that thing going, allowing the speculators to go ahead and to persuade the markets that something bad will happen to the bank or the country or the banking system, it is very difficult to stand against that wind.
IDD: Do you more routinely speak with your counterparts at central banks in the current credit market environment?
Rimsevics: Certainly we are in touch with each other. We are trying to communicate and tell where we are, what we are doing, and what we think about it.
IDD: When did it become more frequent?
Rimsevics: We noticed that we cannot just deliver the message inside the country and that would be sufficient. We realized that we had to travel, we had to meet the people when we saw absolutely unfair allegations and criminal rumors from people who just simply were there to make money by spreading the rumors which have nothing to do with the current financial situation.
IDD: Has Lehman Brothers’ failure had an impact on Latvia?
Rimsevics: None at all.
IDD: Bear Stearns?
Rimsevics: The same thing. You have to remember when you look at these banks going down we have very mixed feelings. Bear Stearns was attacking Icelandic Krona and when you are in the position of a central bank you take it personally.
IDD: When you say Bear Stearns was attacking, you mean they were speculating against it?
Rimsevics: They were speculating and selling short. They wanted to make money.
IDD: Lehman too?
Rimsevics: I suppose so. Some of these banks were very much into making money on somebody else’s backs.
IDD: How did Bear exactly do it? Did they short the government debt or the currency?
Rimsevics: The currency. Spreading rumors and reports that this country and this currency will go under and so on. Therefore you understand I don’t have any sympathy for them. Sorry.
IDD: Do you think your feeling is echoed by other central bankers?
Rimsevics: I think somewhere deep in their hearts, yes.
(c) 2008 Investment Dealers’ Digest and SourceMedia, Inc.