Latvia (from Economist website

Ailing fast

Oct 7th 2009
From Economist.com


Bad news from Latvia raises fears of contagion across eastern Europe

THE patient emerges from intensive care, hurls the medicine at the doctors and bites his blood donor. That may be an unfair characterisation of the recent news from crisis-stricken Latvia, but it is pretty much how outsiders see it. The prime minister, Valdis Dombrovskis, is refusing to make the spending cuts mandated by international lenders and has floated a new law that would partially expropriate foreign banks’ loan books.

It would be worrying enough if the European Union’s weakest economy defaults, devalues or implodes. But what scares outsiders more is the effect of Latvia’s latest wobble on other ex-communist economies, which until this week seemed to be surviving the financial crisis with less trouble than some had feared.

In recent weeks, the news from Latvia had seemed mildly encouraging, after a year during which the country has been kept afloat thanks to an $11.1 billion international bail-out. The breakneck decline has slowed: the economy is expected to contract by 17.5% this year, but by only 3% in 2010 and to return to growth in 2011, according to a forecast by SEB, a Swedish bank (and big lender to Latvia). The current account, which showed a yawning deficit of 1.42 billion lats ($3 billion) in the first seven months of last year has been transformed to show a 581m lats surplus in the same period of 2009.

The main outstanding issue is next year’s budget deficit. International lenders had softened the target to a mere 8.5% of GDP; the government still had to push through spending cuts of 500m lats to meet this.

But this week Mr Dombrovskis startled outsiders by saying that cuts of only 225m lats would be necessary. He has pencilled in a further 100m lats in better tax revenues—counting, apparently, on a faster economic recovery than anyone expects. The hesitation has brought stern warnings. Sweden’s finance minister, Anders Borg, said outsiders’ patience was “limited”—his country is due to provide SKr10 billion ($1.45 billion) in a loan tranche in early 2010. The EU’s monetary affairs commissioner, Joaquín Almunia, has publicly rebuked the government too. Mr Dombrovskis has now backtracked, saying that if the cuts are necessary, they will be made.

But doubts remain. Mr Dombrovskis lacks the authority to push tough measures through parliament and his public wobble could be seen as an attempt to summon up another burst of international pressure on the government to do the right thing. If so, it is risky.

The same could be said about another of Mr Dombrovskis’s moves—calling for a draft law that would restructure domestic assets of foreign banks. Borrowers would be liable only for the collateral value of their loan (eg, a house bought with a mortgage) rather than the whole amount. Banks would also be unable to evict defaulters from their homes without rehousing them. A fall in property prices of over 50% has sent Latvia’s private-sector debts to foreigners ballooning. They will need restructuring eventually. But this proposal looks unworkable, clumsy and damaging. Shares in Nordic banks, which have been the biggest private-sector lenders to Latvia, dipped on the news.

If Latvia fails, with a strike by international lenders prompting a debt crisis or a bank run, the spotlight then turns to the neighbouring Baltic states of Estonia and Lithuania. They are not in the same political mess, but both have also pegged their currencies to the euro and are facing huge and painful adjustments. Some wonder if the EU might accelerate its recognition of Estonia’s impressive progress in sorting out public finances by giving it early approval of its plans to join the euro in 2011. But where would that leave Lithuania, which is nowhere near balancing its books and borrowing expensively from private lenders instead of turning to the IMF?

An even bigger question involves the future co-operation between the IMF and EU. They worked together closely during the emergency rescue of Latvia in December. Now ties are strained: the IMF thinks Latvia should devalue its currency. EU officials are determined that it should not, for fear of the wider effect on ex-communist countries that are trying to join the euro zone. That has led the EU to squeeze the IMF into accepting softer conditions on Latvia than it would have wished for. For all those involved, in Brussels, Washington, DC, and Riga, patience is running out.

The World in 2009

My contribution here...

North stars
Edward Lucas, VISBY
From The World in 2009 print edition


Introducing the Nordic Atlantic Treaty Organisation

Designed to keep the Germans down, the Russians out and the Americans in, NATO will celebrate its 60th birthday in 2009 in a sorry state. Its campaign in Afghanistan is not going well. Its members are at odds about how to deal with Russia. But look north and the European security picture will be brightening.

Sweden and Norway, once prickly friends, are striking up a new defence relationship.

This might look odd: Sweden is non-NATO and a member of the European Union; Norway is a keen member of NATO, but has stayed out of the EU. But now those differences are being set aside. Co-operation on airspace monitoring, combined military procurement, joint training and co-ordinated intelligence work will all be bearing fruit in 2009.

Panting to catch up is Finland, neutral in theory but in practice also spooked by an increasingly assertive Russia. That's clever psychology by the Norwegians and Swedes: Finland would resist if it felt pressured to join in. But it hates being left out of anything its Nordic neighbours get up to. For the core three, 2009 will bring calls for higher defence spending and new efforts to extend Nordic security co-operation to other countries.

The two pressing tasks for the new Nordic security partnership (don’t call it an alliance, or you will get a very chilly Scandinavian scowl) are to work out how to help the Baltic states, and to make plans for what they call the “high north”, the energy-rich area that lies between Europe and the North Pole. The Baltic states (Estonia, Latvia and Lithuania) have been full members of NATO since 2004. But the alliance has made no plans to defend them, not wanting to break the taboo on counting Russia as any kind of threat. That will change in 2009, as NATO’s bureaucracy in Brussels works out the practicalities.

But no NATO efforts to defend the Baltics in a crisis make sense without help from Finland and Sweden. As EU members, they will offer political support. And Sweden’s airspace would offer the best way to bring reinforcements if needed. The Baltics will be keen to join in the new Nordic nexus, starting with airspace monitoring.

America is watching the Nordic efforts with increasing interest, as is Canada, once a peace-monger but now deeply alarmed by Russian adventurism in the Arctic. Add Britain for good measure, beef it up a bit, and this could turn into a handy new outfit to deal with the hot­test spots of what some people are calling the new cold war. All it needs is a snappy name. What about the Nordic Atlantic Treaty Organisation?

Andrew Brown book review

Sweden

Potential turbulence

Jun 26th 2008
From The Economist print edition

Fishing in Utopia: Sweden and the Future that Disappeared By Andrew Brown Granta; 261 pages; £15.99 Buy it at Amazon.co.uk

FISHING, journalism, and the death throes of the Swedish social system are the unpromising ingredients of Andrew Brown’s thought-provoking autobiographical memoir. The story of a young drifter who rebels against a privileged upbringing in Britain and goes away to work in a pallet factory in provincial Sweden in the late 1970s might seem impossibly dull. But Mr Brown’s prose is as clear and bewitching as the lake waters in which he learns to fish. Having immersed himself, and the reader, in the all-encompassing conformism, thrift and diligence of the Sweden of that era, he charts the story of his own rebellion, disenchantment and ultimate reconciliation with a country that in the meantime changes almost beyond all recognition.

Having learnt his trade by jotting down choice phrases on bits of cardboard in the factory, Mr Brown becomes a journalist. Sweden proves surprisingly interesting: Soviet submarines haunt the coast, provoking panicky incomprehension in a public convinced that virtue equals untouchability. A secular priesthood of social workers snatch children from “elitist” parents (though that scandal, he later discovers, turns out to be not what it seems).

Flushed with success, he abandons small-town Sweden (and his first wife and child) for the delights of London. His time as Britain’s best reporter of religion and his early evangelism for the internet are all but omitted; material, perhaps, for another book. Instead the focus is on his regular trips back to Sweden, sometimes as a correspondent, sometimes in search of somewhere sufficiently remote to write books: swapping what he calls the mosquitoes of distraction in city life for the thought-inducing real ones of a Swedish forest in high summer.

Readers who know the Nordic countries will delight in the author’s keen ear and eye for the nuances of language, landscape and social customs. The polite incomprehension prompted by a papal visit to a place with almost no Roman Catholics is particularly well drawn. A Finnish journalist colleague invites Mr Brown to feel her thigh: she is wearing suspenders and a garter belt in what she coyly tells him is a protest against the church’s repressive sexual mores. She follows it up with an invitation to dinner in Helsinki later. In some parts of the world, that would count as quite unusual.

The fish and the weather don’t change (though Mr Brown’s growing prosperity as a journalist means that he can afford better kit). But Sweden does. As the harsh echoes of the impoverished, hierarchical system of the 1930s fade, so too does the moral tone of the society. It is only the memory of poverty that creates the social discipline necessary for prosperity, he suggests; once that is forgotten, the seeds of decay begin to sprout.

Mr Brown is an interesting man; introspective and with perhaps a touch of prissy self-importance. Much the same goes for Sweden; like him, it has become less unusual than it used to be. Once home to a system that seems to modern eyes as distant as communism, it is now a more-or-less normal capitalist country, troubled by the task of integrating the tenth of the population that consists of unhappy and often unseen immigrants. What comes next? Even the sapient Mr Brown does not venture a guess.