Latvia Crisis May Trigger Asia-style Bank Crisis in Eastern Europe

May 21 (LPAC)--The rating agency Standard & Poor's on May 17 has stripped the tiny Baltic country, Latvia, of its 'A' standing, citing an increasing risk of a hard landing and the failure to slow runaway spending. Latvia's sovereign debt was cut to BBB+, with warnings of further relegation to come. The current account deficit was 26% of GDP in the Fourth Quarter-- the world's highest. The government does not seem to have a sense of urgency in tackling the mounting imbalances, said the agency.

Carsten Valgreen, chief economist for Danske Bank, points out that not only Latvia but much of Eastern Europe is looking vulnerable, with "back-sliding populist leaders and a dangerously high mortgage debts" in euros, Swiss francs, and lately, yen. All the red lights are flashing. The region looks very much like East Asia before the crisis in 1997, and by some measures it is worse, he added. Over 85% of all household and corporate debt in Latvia is contracted in foreign currencies, a proportion similar to Argentine dollar debt before the collapse of the peso peg in 2001.

Hungary, Poland, Croatia, Romania and the other Baltic states have all been snapping up foreign loans, accounting for much of the outstanding $138 billion of Swiss franc debt outside Switzerland by the end of 2006. Fitch Ratings said credit growth last year reached 68% in Kazakhstan, 64% in Azerbaijan, 55% in Estonia, and 46% in Romania, all far above their sustainable speed-limits.