Here' s a brief summary of my views discussed with Edward Hugh at http://latviaeconomy.blogspot.com/2008/12/why-imfs-decision-to-agree-lavian.html and http://latviaeconomy.blogspot.com/2008/12/travelling-in-good-company.html ...
Wonkish and not in particular logical order (in December 2008), and I am the " Resident" (Evil):
well, there is no question that it has been a fundamental mistake to de facto fix the FX rate in such a narrow range and the all Krugman's working in full extent (destroyed local economy after the exit from USSR, and small, and quite open), adding up the easy access to foreign money (mainly via Scandi banks that made the same mistake in the early 1990-ties?), and promises of joining the euro-zone very soon ... made the illusion of fast catch-up to West so sweet!
Well, it is not clear to me - why the Latvian government has decided to borrow from IMF consortia, devalue the workforce instead of currency? But I would list following items:
1. Government suddenly realized that the revenue in government budget are falling rapidly due to local and global economy, so they needed to fill the gap, but that was not the most critical ..
2. if not the collapse of Parex bank, that will need ca 1.5-2.5 bln EUR from government to keep alive, and this came as a "slam dunk" to enter the emergency ...
3. i would say that rather fortunately, government was forced to ask IMF for funding, as government reforms were desperately needed ... (the politically unpopular reforms got new enemy, and abroad)
4. I still do not get - why the donors accepted the no devaluation scenario ... i do not know either, what the government has promised, but:
a) it may be due to current global conditions, as i list here ..
b)Sweden (other Scandi too) was actively promoting orderly solution, as this may be disorderly for Sweden/Scandi ... Let' s speculate - this is a rather temporary bailout of Scandi banks, and they will take the hit as global conditions stabilizes? Well, why Latvian taxpayer should pay that?
c) Labor deflation is certainly unfair to poor, but government, if i understand correctly, has promised, within the IMF consortia framework agreement, to keep the living standards of "very poor". But current solution favors the rich ...
Still, if the ERM2 agreement with ECB is in force, the ECB should support the +/-15% band ... and this should be used for "managed" floating vs EUR later on, as situation stabilizes ... just to make imports more risky...
Update: Latvian government published the " Letter of intent" addressed to IMF on 6th of January, 2009, download here: http://www.mk.gov.lv/en/aktuali/zinas/2009/January/06012009-01/
Will be "refined" later ...
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