The small Baltic state has been making news again after its prime minister, in the face of a deep recession in the Eastern European region and the inability to improve the situation in his country, proposed that Scandinavian banks who provided loans to mortgage holders slash the amount they owe. The one who stands to lose the most are the Swedish banks, which have a huge exposure on the country. As if the situation isn’t bad enough, the Latvian government received no bids, not a single one, to one of the three auctions it held to roll over its debt. This vote of no confidence particularly relates to plans of “devaluing” the lat, which is pegged to the euro.
Valdis Dombrovskis, the embattled Latvian prime minister, said he was confident he could get his proposal through the parliament in Riga, but was still examining the legal implications of the scheme. But the powerful Latvian central bank delivered an unusually blunt attack on the prime minister, saying that his budget and bank policies were feeding a fresh “wave of distrust” towards the small and highly vulnerable state.
Banking sources in Riga warned that the radical proposal on mortgages, which could see borrowers repaying only a fraction of their loan, would backfire, deterring foreign investment, bringing already low bank lending to a complete standstill and wrecking international confidence in Latvia.
The Baltic state has already raised taxes, cut spending as well as increasing savings in one form or another but nothing is apparently working.
Blog naked capitalism also has a post on this issue, citing stories from various sources.