Sunday, December 21, 2008

Day 102: Riga, Latvia

Boy, what a difference a year makes.

If things in Lithuania were bad, in Latvia they are now miserable.

A year ago my friends and I visited Riga en route to Vilnius. In the Old Town, stores were open, housing prices were still on the increase, and Latvia's economy was just starting to slow from its break-neck double digit growth. True, economists were worried that its economy was overheating and that the Central Bank wasn't doing enough to contain the situation, but at least consumers had money (i.e. credit) and were on a spending spree. The Old Town shops selling traditional souvenirs, as well as restaurants and eateries, were full.

Alas, some 11 months later, perhaps Latvia's economy is, after Iceland's, Europe's most worrisome.

First, the asset bubble has popped and property prices, which fueled this economic boom, are on a downard spiral. The lat, which remains pegged to the euro, should in theory depreciate in value, but because it must remain pegged to the euro (thanks to EU accession rules), the local currency board wastes millions of euros just to maintain the peg. Latvians are panicking so much, and thus withdrawing cash at such a furious pace from banks, that ATMs were out of cash several days before my visit. With tourism bringing in a lot of money in recent years, this is likely to fan out due to the economic crisis spreading all over Europe. Parex Bank, Latvia's biggest, was nationalized by the government, but not after trying to keep it afloat with a (failed) 300 million euro rescue. Sweden and Denmark are now loaning Latvia some 500 million euros for short-swaps in a dire sign of Latvia's economic malaise.

Unfortunately, the same picture was obvious in Riga, as many of the shops in the Old Town are now closed--and will remain so until things get better. Alas, they will get worse before they get better--and that is a safe conclusion to make.

Latvia's economy will contract next year, and as the EU's third poorest member state per capita, that does not bode well for its citizens.

Having spent one day here, I felt depressed a bit, despite the good weather. It is just so mind-boggling how so many people saw this coming, yet the Central Bank didn't do much to calm the storm before it was too late.

And now most of Latvia's 2.5 million people are feeling the effects of a protracted economic contraction and a drop in living standards.

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