By Milda Seputyte
July 29 (Bloomberg) -- Lithuania’s need for an international bailout depends on neighboring Latvia’s economic performance and its own banking industry, not on its collapsing output, economists at Danske Bank and Capital Economics said.
The Baltic economy, which plunged a preliminary 22.4 percent last quarter, isn’t in “urgent” need yet of assistance from the International Monetary Fund, said Lars Christensen, head of emerging markets research at Danske Bank in Copenhagen.
The economies of Estonia, Latvia and Lithuania, which had the EU’s fastest growing economies from 2004-2006, are caving in after a real-estate bubble burst, cheap credit evaporated and slack foreign demand hurt exports. Economists and ratings companies including Standard and Poor’s have warned Lithuania may be forced to follow Latvia in accepting a bailout to turn around the steepest decline of all developing regions.
“There’s a little bit more room for waiting to go to the IMF,” Christensen said yesterday in a phone interview. “Lithuania is not in the same place as Latvia. I’m not sure it’s seen as different from Frankfurt or London but there’s a difference in degree of the crisis here.”
Eastern European nations, including Latvia, Romania and Hungary, have received more than $90 billion in international aid since September.
Latvia Key
The key for all three former Soviet republics is Latvia, which took an international bailout after its second-biggest bank needed a state rescue, said Neil Shearing, an economist at Capital Economics Ltd. in London said.
“The real surprise is that Lithuania hasn’t been forced to go already,” said Shearing. “For now at least, it depends on what’s happening in Latvia. We can get this contagion effect -- that means Lithuania would essentially have to devalue and probably end up restructuring debt and do that in the context of the IMF program.”
Latvia turned to a group led by the European Commission and the IMF for a 7.5 billion-euro ($10.6 billion) stabilization loan in December.
Latvia and the IMF reached a preliminary agreement on July 27, paving the way for the first loan payment from the Washington-based fund since December. That followed a 1.2 billion-euro transfer by the European Commission, helping quell concern about a devaluation in the lats that may have also destabilized the Lithuanian litai and the Estonian kroon.
Banking Industry
Unlike Latvia, Lithuanian and Estonian banks are mostly foreign-owned, helping stability, Shearing said.
Stockholm-based SEB AB, the largest bank in Lithuania, and Swedbank AB, the biggest bank in Estonia and Latvia, face soaring loan losses in the Baltic states. Swedbank and SEB reported net losses in the second quarter after loan losses jumped. They have both reduced lending in the Baltics.
Lithuania “has fallen into the same category as Latvia,” said Zsolt Papp, an emerging-markets economist at KBC Groep NV. “This means the government sooner or later will need to turn to the International Monetary Fund or the European Union.”
Speculation that Latvia may be forced to give up its fixed exchange-rate system, followed by Estonia and Lithuania, spread in June after Sweden’s Riksbank boosted its foreign currency reserves, a move interpreted by some as preparation for a fallout in the Baltics.
“This will bring up the question of devaluation again in the entire region,” Papp said. “The Baltic countries will have to seriously look at their currency regimes.”
‘Already History’
Lithuania’s government is paring spending and raising taxes to tackle faltering budget revenue. Lawmakers last week approved a second revision to the 2009 budget plan that includes lifting the value-added tax rate to 21 percent from 19 percent and cutting wages, after reducing spending by 7 percent of gross domestic product in the first six months.
The second quarter is “already history and the fact that the government managed to cope with public finances shows that additional budget cuts were well-timed,” said Vilija Tauraite, an economist at Vilnius-based SEB Bankas. No major collapses are expected in public finances that would push the country to ask for a loan from the IMF.
Still, Finance Minister Ingrida Simonyte said in an interview on July 16 that while she expected no bailout in the near term, she didn’t rule out aid in the future.
“We must always keep this option in mind,” Simonyte said. “I can’t say it’s for certain that we would never use it, that we would never need it. It would be stupid of me to rule this out.”
To contact the reporter on this story: Milda Seputyte in Vilnius at mseputyte@bloomberg.net
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