December 08, 2008
The collapse started a month ago. On Nov. 8, the Latvian government announced it was taking a controlling 51 percent interest in the market-leading Parex Bank, setting off a chain of events that has now drawn Latvia deep into financial crisis.
Until then, the prevailing view of the government was that the international financial crisis that had set capitalism’s finest institutions shaking would do little harm to Latvia, which was protected by its isolation and its hitherto exemplary liberal economic management.
The month since has plunged Latvia into the abyss. The government’s involvement in Parex has deepened to around 85 percent and it is desperately looking for buyers as investors withdraw money. But other prognoses for the economy have also worsened. The budget adopted just a few months ago had already forecast a drop in the Gross Domestic Product of around 1 percent, in line with the prevailing world economic downturn in 2008. But that has been radically revised and now is likely to be nearer 5 percent, signalling a damaging economic recession and a sharp decline in government revenue. The forecast budget deficit has doubled from 1.5 to 3 percent, endangering prospects of Latvia joining the euro zone in the coming few years.
A series of backdowns and reversals on the part of Finance Minister Atis Slakteris has made ludicrous his earlier confident assertions that Latvia, unlike some other countries (such as Iceland and Hungary), would need no help from the International Monetary Fund or other international financial institutions. In mid-November the government admitted it may need to borrow around EUR 3 billion. Now the sum mentioned is EUR 5 billion, although some analysts say around EUR 7 billion is the likely figure.
The IMF or any other international benefactor will impose strict conditions on government spending in the form of a stabilisation plan. Here is the really bad news: in Prime Minister Ivars Godmanis’ address to the Saeima last week he forecast a cut in government spending of around LVL 600 million—around 11 percent of all expenditures—and predicted that it would not be possible to avoid education, health, social services and other large areas of government spending.
The politics of this will be intense. In September a huge demonstration of teachers, health workers, police, fire officers, transport workers and others in the public sector called for a halt to their relatively declining wages and a guarantee of better conditions. This widely supported action was given extra fillip by Government Auditor Inguna Sudraba, who revealed systematic abuse of payment guidelines for government bureaucrats: a system of bonuses (prēmijas) has supplemented already generous salaries. In the Transport Ministry, run by chief government head–kicker and tycoon Ainārs Šlesers, officials had had 14 bonus payments in one year! The train, tram, bus and trolley bus drivers and maintenance crews had on the other hand received no such largesse.
To some extent, the scenario in Latvia reflects that in so many other countries still trying to make sense of a vicious global economic downturn, and trying to restore confidence in financial institutions. Certainly the situation is far worse in Russia, although denied by its government. It was partly the flow of Russian money that had made Latvian banks rich, employing the extraordinary slogan “We are closer than Switzerland”!
As elsewhere, property prices have also plunged steeply in Latvia, threatening all those who had been banking, literally, on continually growing prices to cover their loans. This may bring some sanity to Latvia’s overheated property prices (why does the price of a property in Rīga approach that of one in Paris or Berlin?), but along the way will bankrupt many.
Latvia showed it was capable of its own financial crisis nuances: in a move that caught the attention of the international press, Latvian security police brought in for questioning two people—a musician and a university economics lecturer—for spreading false information about the state of Latvian financial institutions. According to law, the deliberate spreading of such false information is illegal. It is a provision that had been introduced in a number of Eastern European countries to counter malicious disinformation that had resulted in several runs on banks in still fragile post-Communist economies in the 1990s. The musician made a throwaway comment about the banks during a concert. The economics lecturer’s view that people should not put money in banks and or keep it in the national currency, the lat, was reproduced in a Ventspils newspaper. Ironically, the actions of the security police made his views known nationally and even internationally: the American Wall Street Journal headlined this as “How to Combat a Banking Crisis: First, Round Up the Pessimists.” Despite the air of Keystone Kops, the issue of confidence in the financial sector remains.
The economic meltdown represents the final catastrophe in a year of great difficulty for Godmanis’ coalition government, criticised on all fronts for its handling of a number of economic and social issues, as Godmanis tried desperately to distance himself from the politics of the previous failed Prime Minister Aigars Kalvītis. As well as the growing dissatisfaction of public sector workers, the government narrowly defeated a popular referendum that would have allowed the dissolution of the Saeima through a referendum process. Relations with President Valdis Zatlers—originally seen as a badly chosen puppet of the coalition parties—have grown increasingly tense as he criticises the government both for lack of economic planning and for failure to move on a number of constitutional issues that have long debilitated Latvian politics. The failures of the year have also brought the leading People’s Party (Tautas partija) to its lowest point ever, a recent poll showing only 2.9 percent of the electorate would vote for it now.
Finally, spare a moment’s thought for Godmanis. He is a significant figure in Latvian politics and was the prime minister at the most difficult time in 1990-1993 when he oversaw the end of Soviet rule in Latvia. He also oversaw the first huge economic downturn of the time that brought the old stagnant Soviet economy into a period of huge inflation, bankruptcy of enterprises, job losses and general turmoil. Somehow the government did get Latvia out of the Soviet Union and even set the basis for its future stable currency, and had the peculiar distinction of being the only government in Eastern Europe to survive a full term in that period. Godmanis could go down as presiding over both major economic disasters of recent history in Latvia—neither of them of his own making.
Uldis Ozoliņš is immersed in politics both as a hobby and a profession. He lectures and researches in politics in Australia and on frequent trips to Latvia, and considers that the more closely you study politics, the less likely you are to become a politician.
