Stokes: Will Latvia Start A Dangerous Domino Effect?

In the light of equity market dynamics this appears to be off the fire-line, but consider both sides of the trade ...

Mary Stokes has an article "Latvia: Will It Start A Dangerous Domino Effect?" at RGE Monitor today, here is the conclusion, but it is worth reading the full story:

Latvia is teetering on the brink of default and devaluation. If this small economy descends into crisis, it is likely to have ramifications far beyond its borders. Strong trade and financial linkages, not to mention similar macroeconomic vulnerabilities, mean a Latvian crisis would almost surely spread to Estonia and Lithuania’s economies.
A Latvian crisis would also have negative spillover effects on Sweden via its banks’ strong presence in Latvia and the mass defaults that would result from a Latvian devaluation given the high levels of fx-denominated lending (around 85%) there. While Sweden’s economy should avoid financial crisis, its growth prospects could be severely dented.
The big wildcard is how a Latvian default/devaluation would affect the greater CEE region. Direct trade and financial linkages between the Baltics and other CEE economies are limited. Nevertheless, many of these countries – particularly Bulgaria and Romania – share similar macroeconomic vulnerabilities to Latvia, meaning a crisis there could ‘wake up’ investors to the potential for crises in the rest of the CEE region.