Are the Baltics the new Argentina?

For those of you who actually care about anything international, there is an Emerging Markets crisis brewing right now in the Baltics. After reading posts from Alpha Sources, naked capitalism, Market Movers, and Bronte Capital on the subject, I started to think people actually cared about the tiny Baltics. So, let me add my two cents.

The Baltics are looking a lot like Argentina was before it collapsed at the beginning of the decade: fixed exchange rate, large current account deficit, significant foreign bank lending, overheating economy turning to bust.

This combination is a toxic mix that will certainly end in the disaster it did for Argentina. I have a vivid memory of being in Buenos Aires when workers were rioting in the streets, knocking over cars and setting them on fire. Foreign banks were littered with Graffiti, including the word “ratas,” scrawled across them. Many banks were shut down and closed and too many banks I could see had armed guards with submachine guns out front to protect them. I can’t say this same disastrous scenario awaits the Baltics, but things could get pretty dicey there in any event.

Claus Vistesen at Alpha Sources says:

As the Q1 GDP numbers came in for the Baltics I concluded that it was very likely that the region had entered a recession. In light of the proverbial definition of a recession as a consecutive quarter contraction it seems clear the Lithuania managed to smartly skirt the recession in H01 2008. As far as I can see at this point and from Eurostat’s data Estonia was the only one of the three Baltic economies that contracted in Q1 2008 (-0.5% and 0.1% for Latvia).

However and as ever before, the Baltics is increasingly getting stuck in stagflation and one of a particular sinister kind. In the case of the Baltics they may already be seeing the beginnings of a hard landing, whereas others continue to build up steam making it almost inevitable that they too will erupt at some point.


More to the point, the Baltics have a lot of hot money invested in their economies as much of the lending growth came on the back of foreign financial investment. When distress hits, one should expect a giant sucking noise from foreigners repatriating funds. This will leave the Baltics subject to credit deflation just as the economy is entering recession.

When one adds the slow economy and the high inflation to a fixed exchange rate and high current account deficits it says: the Baltics do not have the appropriate fiscal and monetary policy for a fixed exchange rate.

One of two things must give: the exchange rate peg or the economy. In Argentina, it was both.

  1. Jüri Saar says

    I thought that the reason for the Argentinian collapse was unsusistainable government borrowing that wasn’t limited even after they droped the peg – they just kept spending like drunken sailors :)

    “the Baltics do not have the appropriate fiscal and monetary policy for a fixed exchange rate.”

    Ok, what is the appropriate fiscal and monetary policy for the Baltics? Being an Estonian, I’m of course more interested in what would have been appropriate for Estonia. THoughts?

  2. Edward Harrison says

    Thanks for the post. Here’s what I see. All three nations have current account deficits (capital account surpluses). They also have low interest rates: all around 6% over the past 3 months. Simultaneously inflation is exploding and they are pegged to the Euro.

    What this suggests is that the economy is overheating and aggregate demand has been stimulated both by easy money (interest rate policy) and easy credit (lending growth). This is unsustainable.

    Given the fixed exchange rate, the appropriate course of action would be to increase deposit reserve requirements and to increase interest rates to dampen liquidity.

    Look at Iceland and the hot money that forced them to hike rates to 15%+. This is what has to happen.

    On the currency side of things, a pegged currency is not the most desirable currency regime. I think a dirty or free float would be a good idea.

    The site Eastern Europe Economy Watch has some very good information that may yield other suggestions:

    Cheers. And thanks for your feedback.

Comments are closed.

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