Greece Must Copy Baltic Debt Crisis Model to Survive, Finance Chiefs Say
Greece must deploy budget cuts on the same scale as the Baltics to survive its debt crisis and sacrifice economic growth to restore fiscal health, Latvia’s central bank governor and Lithuania’s finance minister said.
The Baltic nations, whose fixed exchange rates last year forced them to execute the European Union’s toughest austerity packages to protect their finances, suffered the 27-member bloc’s deepest recessions. Latvia’s economic output slumped an annual 19 percent in the third quarter, Lithuania’s contracted 19.5 percent the previous quarter, while Estonian output dropped 16.1 percent in the same period. All three had their ratings outlooks raised last month at Moody’s Investors Service.
Greece today called for the activation of a 45 billion-euro ($60 billion) emergency loan from its EU partners and the International Monetary Fund as the government struggles to meet soaring debt costs. The yield on Greek two-year bonds yesterday jumped above 10 percent, more than double the rate on Latvia’s 2014 note. Latvia cut public spending by 10 percent of gross domestic product last year after receiving a 7.5 billion-euro EU and IMF-led loan in 2008.
‘No Other Choice’
“The Greek situation is similar to Latvia’s in that there is no other choice but to downsize expenditures,” Latvian central bank Governor Ilmars Rimsevics said in an interview last week. “We are very pleased that Latvia is more and more mentioned as a template because a year ago people were thinking we are going to fail. Today, things are more or less out of the woods.”
Greece is more likely to default than all the EU’s emerging members, credit default swaps show. The cost of insuring against Greek default jumped to an all-time high yesterday and Greek 10- year yields rose to the highest since at least 1998.
After Greece’s announcement of the rescue request, the 2- year yield declined 82 basis points to 9.481 percent. The yield premium on 10-year Greek bonds over bunds narrowed to 500 basis points from 590 basis points.
Credit-default swaps tied to Greece’s government bonds climbed 158 basis points to a record 650 yesterday, according to CMA DataVision prices, after the European Union’s Luxembourg- based statistics office said its budget deficit may have exceeded 14 percent of GDP last year. Greek CDS fell 54 basis points to 591 today.
House in Order
Latvia’s 5-year credit default swaps were at 328 basis points yesterday, compared with a high of about 1,200 basis points in March 2009. Five-year Lithuanian CDS were at 219 basis points.
Even after spending cuts, Latvia’s deficit widened to 9 percent of GDP last year, the EU said yesterday, as the economy shrank 18 percent. The Riga-based government has pledged more spending cuts in the next two years to comply with the euro- adoption limit of 3 percent. Prime Minister Valdis Dombrovskis’s government targets the currency switch for 2014.
Lithuanian Prime Minister Andrius Kubilius’s measures helped cap the public deficit at 8.9 percent of GDP, without having to resort to a bailout. Without wage cuts, tax increases and other spending cuts, the deficit might have swelled to 17.5 percent, he said on April 15.
“If a country can’t raise money at favorable terms to finance the deficit, the country must reduce the deficit; this is something we know a lot about,” said Finance Minister Ingrida Simonyte in an interview last week. “Baltic countries had to clean up their houses very quickly in order to get back on track,” while “Greece was able to raise money in international markets last year at rates I would envy.”
No Delay
Even so, Prime Minister George Papandreou’s government, faced with street protests and strikes against budget cuts, has failed to convince investors Greece can shore up its debt. The Greek government can’t afford to delay austerity measures, Rimsevics said.
Swedish central bank Governor Stefan Ingves, who said last week that Greece’s bailout may follow the path set out by Latvia, added that while the EU and IMF would be involved in the financing, “in the end the country itself will have to deal with its fiscal problems.”
“It should be a Greek program, the Greeks should be designing, constructing and communicating it,” said Rimsevics. “The key question is the speed and the clarity of the measures and that the market believes in these measures. The more dragged out in time, the less effective they are.”
The Greek example also shows that the euro isn’t the safe haven it was once perceived to be by the EU’s emerging members.
“The countries can learn that euro is not a solution, it’s always the fiscal policy, the home policies that are the solution,” Simonyte said. “You can’t spend a lot of money and hope there will be somebody who will clean up your unsustainable deficit.”
To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net
Rate this Page