This morning has brought yet more news on what appears to be a growing issue which is the banking sector of Latvia. It has been around a decade since Latvia made the economic news as a type of test case for a joint IMF ( International Monetary Fund) and European Union bailout which was caused by this.
Despite the bailout, Latvia suffered the largest decline in economic output of anywhere in the world between 2007 and 2009 – a 24% drop in GDP. Unemployment quadrupled; and that doesn’t include the estimated one in 10 of the workforce who left the country to look for a better life somewhere else. ( The Guardian).
Since then (2014) Latvia abandoned its own currency the Lat and adopted the Euro although it had pegged its currency to the Euro.
This morning has seen the ECB ( European Central Bank) take action.
The Financial and Capital Markets Commission (FCMC) has imposed a moratorium on ABLV Bank, following a request by the European Central Bank (ECB). This means that temporarily, and until further notice, a prohibition of all payments by ABLV Bank on its financial liabilities has been imposed, and is now in effect.
It is that word “temporarily” again as we note that until further notice was sufficient on its own. So how did we get here?
In recent days, there has been a sharp deterioration of the bank’s financial position. This follows an announcement on 13 February by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network to propose a measure naming ABLV bank an institution of primary money laundering concern pursuant to Section 311 of the USA PATRIOT Act.
ABLV has been accused by the US of being linked to North Korea. As to the scale of the issue there is this.
ABLV Bank has been supervised by the ECB since November 2014, by virtue of the bank being one of the three largest credit institutions in Latvia, as measured by total assets
The ECB may be forgiven for perhaps wishing it was not the supervisor here. Those who hold the ABLV bank bonds totalling US $95 million that mature on Thursday may be forgiven some nervousness too.
Meanwhile as you might expect ABLV itself has found credit hard to come by meaning that the central bank is providing assistance. From the Baltic Times.
“Based on the request from ABLV Bank and a supporting opinion from the Finance and Capital Market Commission, the Bank of Latvia has decided to grant a EUR 97.5 million loan to ABLV Bank against a reliable pledge of highly liquid securities,” the Bank of Latvia said, stressing that the value of the pledge was much higher that the loan amount.
The last bit may be regretted if you think about it and more seems to be on the way.
As reported, ABLV Bank has decided to pledge some securities, asking in return a loan of up to EUR 480 million from the Bank of Latvia, order to stabilize its situation.
Bank of Latvia
This has its own problems as this headline from it yesterday implies.
Latvijas Banka continues its business as usual.
Why announce this and especially on a Sunday? Well it has its own problems.
during the absence of the Governor, his duties are performed by the Deputy Governor.
Why is he absent? Bloomberg explains.
Latvian authorities prepared to explain the detention of ECB Governing Council member Ilmars Rimsevics by the anti-graft bureau in a weekend of activity culminating in the early-Monday imposition of a payment moratorium on the nation’s third-largest bank.
Officials including Prime Minister Maris Kucinskis and Finance Minister Dana Reizniece-Ozola called on Rimsevics, 52, to recuse himself from his duties as the Baltic state’s anti-corruption office pursued an investigation against him.
This is awkward to say the least as he is unable to lead the rescue effort for ABLV because not only is he under investigation he has been detained, The whole issue of money laundering and corruption is a live one in Latvia partly due to its close connections with Russia. A bit like the Cypriot banking sector we see that one needs to take great care when accepting Russian private money and to this we can add apparent involvement with North Korea which is unlikely to improve anything.
What about the economy?
The latest Bank of Latvia Monthly Development report brought good news.
GDP growth has been very strong in 2017, exceeding forecasts. In the second quarter, GDP grew by 1.4% quarter-on-quarter (according to seasonally adjusted data) but in the third quarter of 2017 – by 1.5%. Thus, annual GDP growth reached 5.8% in the third quarter of 2017 (according to seasonally adjusted data – 6.2%).
Thus there was quite a surge helped by various factors such as the better economic performance of the Euro area and in particular the other Baltic states. Also there was this giving a helping hand.
As Russia’s economic growth was stabilising, Latvia’s exports of goods to Russia grew by 36.6% year-on-year in the first ten months of 2017. The expansion of exports was largely supported by an increase in exports of beverages, machinery and electrical equipment and
I have given the good side of the coin but here is the ying to that yang.
In the first ten months of 2017, imports of goods grew by 16.0% year-on-year……..The value of imported goods rises at a more rapid pace than that of exported goods, thus
increasing the foreign trade deficit in goods.
Although in a small country particular care is needed with the data.
a significant contribution to the increase in imports of goods came from purchasing Bombardier CS300 aircrafts. Earlier in 2017, the JSC Air Baltic Corporation purchased
seven aircrafts and by the end of 2017 it had eight aircrafts of this kind.
Also there was this.
According to the data provided by real estate enterprises, price hikes of standard apartments displayed no trend toward acceleration in August and September, and the annual rate of increase remained close to 10%.
Prices moving like that make us look at the credit figures where we see this.
In six months of 2017, i.e. from May to October, new loans to households exceeded the respective indicator of 2016 by 7.0%, including loans for house purchase and consumer
credits which increased by 9.5% and 8.8% respectively. Meanwhile, new loans to nonfinancial corporations posted a 15.3% decrease year-on-year.
So plenty of credit for housing but in a familiar development none for business. Also UK readers especially will wonder about housing affordability when we see what could be described as a Latvian Help To Buy.
Moreover, the state aid programme for families with children to purchase housing, implemented by the JSC “Attīstības finanšu institūcija Altum”, will be expanded from 2018. It is envisaged that about 1 000 young specialists up to 35 years of age could receive aid
for house purchase in 2018.
Our trip to the Baltics and Latvia gives us food for thought. An economy growing strongly and expected to put up another strong (4.1%) performance this year. The unemployment rate has fallen to 7% although employment has remained pretty stable as we wonder if some joined the migration abroad that has been seen.
In 2000, Latvia’s population stood at 2.38 million. At the start of this year, it was 1.95 million. No other country has had a more precipitous fall in population — 18.2 percent according to U.N. statistics. ( Politico.eu )
Maybe now some will return although the current banking crisis will hardly provide much encouragement and nor will house prices. One thing we do know is that in banking crises the truth is invariably the first casualty.