Using Veritas to Construct the "Per…

29-04-2017 Hits:87255 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:81168 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:81016 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:85486 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:81984 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:84166 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:55229 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:83432 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:83170 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:83062 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:89320 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:87034 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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Last week I blogged about the collapsing of the Latvian Government (see As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis) after previously giving a warning about the CEE countries in a full blown depression (The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!) and the ability for this depression to spread as both economic and financial contagion throughout Europe (Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?). 

 
Well, after reviewing my work on Greece ("Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!) and Italy (Once You Catch a Few EU Countries "Stretching the Truth", Why Should You Trust the Rest?) I realized that many of my readers may not fully comprehend the extent to which the current debt and deficit problems may run. The need to contain the rampant growth in debt has brought about rather draconian "austerity" measures with which sovereign governments are attempting to tame their fiscal issues. The measures are so draconian that they are resulting in near real-time internal deflation. Deflation, on the back of a drastic recession is a recipe for social unrest, not to mention the potential for Depression. The problem with draconian measures is that they are seldom taken well by the populace, and when taken to the point of deflation and in a few cases (and counting) depression, the potential challenge to the current government are extreme and in some cases may end up in that government being dismantled, collapsing or being replaced.
 
Since it appears that very few, if any, sell side analysts, media pundits or well published economic think tanks have factored this very real risk into their models and lines of thinking, we have created a Foreign Claims and Contagion (FC & C) model to be distributed to our professional subscribers that attempts to encapsulate this social unrest probability using a CIA model of government instability from the Henry Kissinger era along with a bevy of our own home grown financial, sovereign fiscal, banking and economic contagion models.
Now, let's depart from the modeled world and delve into very recent history and the real world. 
 
Once again, Latvia finds itself in crisis mode, after the country’s governing coalition collapsed on March 17. With the October 2010 parliamentary elections fast-approaching, the People’s Party—the biggest party in the governing coalition—withdrew to distance itself from the government’s unpopular austerity measures. The government enacted such measures to comply with the terms of its €7.5 billion EU/IMF-led loan deal and to stave off devaluation pressure, as Latvia’s currency is pegged to the euro. In October 2009 and again in January 2010, RGE noted the growing political fissures in Latvia. The key question now is: Will the political crisis jeopardize the country’s EU/IMF-led bailout program and delay economic recovery? 

Bottom Line: RGE believes the latest political crisis poses a risk to continued loan disbursements, but not an immediate one. October elections loom and political tensions will likely heat up further as some parties, like the People’s Party, resort to populist demands in an attempt to curry favor with voters and boost their electoral prospects. 

Latvia’s political crisis also has broader implications. For one, it illustrates the political challenges of economic adjustment via internal deflation (wage and price cuts), a path that Greece is now facing. Two, the crisis highlights the fact that, despite signs of economic stabilization and improved risk appetite in IMF program countries (e.g. Iceland, Hungary and Romania), political risk lurks in the background and needs to be closely monitored, given its potential to derail financing from external lenders. 

Most Likely Scenario: Minority Government Led by Current PM 

Now that the People’s Party has pulled out of Latvia’s government, there are a number of possible scenarios. 

1)      Minority Government: RGE believes the most likely scenario is that Prime Minister Valdis Dombrovskis, of the New Era Party, will continue in his current role and will head a minority government until the October elections. Other analysts (see SEB and Danske) also see this as the most likely scenario. 

2)      Majority Government (formed by bringing in a new coalition partner): Dombrovskis’s ability to form a majority government is limited since wooing another coalition partner from the opposition only a few months ahead of the scheduled elections would be challenging. 

3)      Early elections: Not surprisingly, the People’s Party has said it will not call for Dombrovskis’s resignation given the party’s meager level of support (only 3% of Latvians would vote for the People’s Party according to a January Latvijas Fakti poll), which makes early elections unlikely. 

Is the EU/IMF-Led Loan Program in Jeopardy? 

Now that the government has been stripped of its parliamentary majority, there is a greater danger of fiscal austerity measures being rolled back, which would jeopardize further loan disbursements. This, in turn, would shake investor confidence and endanger the incipient economic recovery. Prime Minister Dombrovskis, himself, noted last week that Latvia risked facing a situation similar to that in Ukraine, where the IMF suspended loan disbursements after the government gave in to populist demands. (See related Critical Issue: How Flexible Will the IMF Be With Ukraine?) 

Latvia’s economy experienced one of the sharpest contractions worldwide in 2009, contracting by 18%. External lenders have played an important role in stabilizing the economy. In December 2008, the IMF announced a program to lend about €1.7 billion to Latvia. Supplementing the IMF loan were financing pledges from the EU (€3.1 billion), the World Bank (€400 million) and several Nordic countries including Denmark, Estonia, Norway and Sweden, for a total package of €7.5 billion (US$10.5 billion). 

Upon taking office in March 2009, the Dombrovskis-led government introduced a series of painful fiscal measures to keep the IMF program on track so that the country would continue to receive loan disbursements and stave off pressure to devalue the Latvian currency. In Q3 2009 alone, the central government laid off almost 6,000 workers and applied an 18% average wage cut to the remainder. The 2010 budget includes 500 million lats of additional cuts and, even with these planned cuts, the budget implies a general government deficit of around 8.6% of GDP, according to the latest IMF country report. Now that the governing coalition controls only 44 seats in the 100-member parliament (and, as noted above, we expect this minority government situation to continue), its ability to comply with loan program conditions is much more limited. Pressure to cut taxes and boost spending will increase. Only last week, the People’s Party sided with an opposition group and backed a reduction in value-added tax. Such populist moves will pose a test for the loan program. 

Latvia’s government has enough cash available for now, but that could quickly change if confidence erodes. The IMF has completed two reviews, but there are still seven more due, with the last scheduled to take place at the end of 2011. The next large disbursement (over €1 billion) is planned for September 2010. As the IMF notes, non-resident deposits have been stable since late May 2009 due in part to “the confidence effect of recent program disbursements.” The concern is that a disruption in loan disbursements would undermine improved confidence and trigger capital outflows. 

While the political crisis does not pose an immediate danger to Latvia’s external finances, it could hold up further scheduled disbursements, which could have a very negative effect on the economy, potentially delaying the recovery and shaking confidence in the currency peg. Romania is a case in point. In October 2009, the collapse of Romania’s government left a political vacuum and raised fears regarding the country's ability to adhere to the loan conditions of its €20 billion bailout package. The turmoil resulted in a temporary freeze of loan disbursements to Romania and shook investor confidence.   

The IMF, itself, has acknowledged the political risk Latvia’s program faces. “Arguably, the main risk is that the authorities are unable to deliver on their commitment to deficit adjustment, given the enormous consolidation already undertaken and the potentially insuperable practical and political challenge of doing more…” 

Model for Greece? 

Some analysts have held up Latvia as a model for Greece, given the country’s introduction of massive fiscal austerity measures. Just days ago, Yarkin Cebeci of JP Morgan said, “The international investor is now confident about Latvia and, in fact, is using the Latvian case as an example for countries who need to deliver on the fiscal front.” 

Like Cebeci, we believe the Latvian case is an example to other countries. More specifically, however, we believe the Latvian government’s collapse serves as an example that the internal deflation path that Greece and other countries are now facing is a politically difficult pill to swallow. Unlike Greece, Latvia has imposed harsh austerity measures on its citizens without triggering social unrest, but their ability to bear further measures may be limited, as suggested by the defection of the People’s Party from government. 

Latvia has grown into a model of fiscal stoicism over the past year with the introduction of a series of painful austerity measures—lay-offs of thousands of state workers, slashed public sector wages, an end to state-subsidized elective surgeries, cuts in scholarships for poor students. So far, there has been little to no public discontent this year, in stark contrast to the recent nationwide strikes in Greece. In Latvia, there seems to be broad agreement on the need for economic adjustment. With the departure of the People’s Party from the government, we will soon get a sense of how far this broad agreement extends as the call for rollbacks in austerity measures gets louder ahead of the October elections. The latest poll numbers do not bode well for Latvia’s current government. According to a recent poll by Latvijas Fakti, only 27% of Latvians approve of the Prime Minister’s performance, a sharp drop compared with the April 2009  level, when he enjoyed strong support, of 50%. 

Political Risk Lurks in Other Program Countries 

Many of the economies in Europe hardest hit by the global financial crisis (e.g. Hungary, Iceland, Latvia, Romania) are seeing signs of stabilization. External financing from the EU, IMF and other external creditors has calmed crisis fears. However, political risk continues to lurk in the background, as RGE has pointed out in a number of different posts (see here and here). Latvia’s political crisis (as well as Romania’s tenuous political situation at the end of 2009) shows how political instability has the potential to delay these economies’ incipient recoveries.