Latvia: Another Bad Egg
Three days ago I stressed that the dissolution of Latvia’s four-party coalition government was looking more and more likely. Today, President Valdis Zatlers announced that he has accepted the resignation of the prime minister and his administration. With the economy in turmoil and now lacking a government, Latvia’s ailments are only surpassed by defunct state of Ukraine. Indeed, with the exception of Latvia’s rigid pegged exchange rate and its compliance with the IMF, not much would appear to separate the two at this point. However, I seriously question now whether Latvia can cling to these two attributes, which may to be the only factors preventing the country from becoming the basket case of Europe.
While the optimists have cited Latvia’s EUR7.5bn joint EU and IMF loan as a good reason to assume the peg will remain, Risk Watchdog has previously alluded to the severity of country’s economic downturn, and widespread currency depreciation elsewhere in Europe, as factors likely to precipitate its demise. In any case, with the coalition dissolved, the world’s lender of last resort no longer has a government to lend to. Will this provide the silver bullet? Possibly, but as far as I am concerned, the writing was on the wall.