Economies Can Recover Without Credit, Just Ask Latvia


Loan droughts became a familiar sight after the global credit bubble popped in 2008. But one euro-zone nation’s has stretched longer than the rest.

Latvia, engulfed by a brutal recession in 2009-2010, managed to expand its economy for five straight years once the slump ended, even as net lending shrank. That’s the euro region’s lengthiest credit-free recovery, according to European Central Bank data. The IMF called it “unusually long.” It finally ended in December.

Creditless recoveries can spring up in the wake of deep economic slumps, wide current-account deficits and banking crises, Martin Bijsterbosch and Tatjana Dahlhaus wrote in a 2011 working paper for the ECB. All three criteria applied to Latvia, and the authors predicted in the paper that the Baltic nation of 2 million people was headed for that scenario.

“It’s been quite biblical,” said Martins Kazaks, chief economist of Swedbank AB’s Latvian unit, who also lists the shadow economy and tensions stemming from the Ukraine conflict as contributing factors. “But at some point even deleveraging has its limits and finally it seems that the credit cycle has turned.”

Credit to Latvian households and non-financial companies inched up 1.5 percent from the previous year in December, but lending is a third lower than at the end of 2010, even after the ECB cut interest rates to record lows, bought about 2.3 trillion euros ($2.5 trillion) of bonds and provided commercial banks with cheap credit.

Latvia muddled through its loan drought as companies self-financed investments, and consumption and wages rose, according to the IMF. Governments in a similar predicament could consider starting credit-guarantee programs for small- and medium-sized businesses, carrying out loan mediation and setting lending targets for state banks, it said.

Candidates could include Greece, which is emerging from a record slump and hasn’t seen credit growth since 2011.

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