Why pay attention when Latvia's debt rating is cut to junk?

Posted Feb 26th 2009 5:30PM by Connie Madon
Filed under: International Markets, Financial Crisis

Few people reading today's news will pay much attention to Latvia's debt being cut to junk. So why even spend time reading about this small insignificant country?

Remember back on February 22, 2008 when the British bank Northern Rock went insolvent and had to be taken over by the state. No one back then really paid much attention. It was a small news item and didn't impress most people. What most people didn't notice was that Northern Rock was one of the top five mortgage lenders in Britain. Looking back, the failure of Northern Rock was probably the beginning of our current banking crisis.

Latvia is a small country, one of the Balkan states along with Estonia and Lithuania. Latvia owes 7.5 billion euros to the IMF which it borrowed for economic development. However, last year Latvia's bubble burst. Banks which were investing in Latvia stopped lending and that caused Latvia's real estate market to go bust. This year it is estimated that Latvia's economy will contract by about 12%.

European banks in other countries like Austria, Sweden, and Belgium who lent money to Latvia are suffering big losses. Latvian credit default swaps jumped more that 30 points to 978.

There are now rising doubts about Latvia's willingness to repay their IMF loan. Risk perception is a very subtle demon that could spread to other shaky countries like Bulgaria and Romania that have large debt imbalances.

So you see, like Northern Rock, Latvia may just be a ripple or it could be the start of a big wave of doubt spreading throughout Europe.

What are your ideas on this matter?

Tags: credit crisis, CreditCrisis, junk, latvia, northern rock, NorthernRock

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Reader Comments (Page 1 of 1)

2-26-2009 @ 5:59PM

Bernie said...

My ideas? "Uh-oh"

3-23-2009 @ 3:15AM

je said...

"Latvia is a small country, one of the Balkan states" ... you mean a Baltic state, probably.

2-27-2009 @ 5:44AM

palle said...

Latvia? Balkan? Hmm... Good knowledge of geography.

2-27-2009 @ 6:25AM

Krists said...

Your economic knowledge must be the same as your geographic. Nonsense.

2-28-2009 @ 4:47AM

Tony said...

Even down here in New Zealand we know where the Baltic is(and Latvia) and where the Balkans are .Too many "financial" pundits are spreading their bulldust these days without knowing their North Pole from their South.