Reggie's Blog & Proprietary Research

Reggie's Blog & Proprietary Research (1277)


Ireland has finally admitted the horrendous condition of its banking system. I actually give the government kudos for this, and await the moment when the US, China and the UK come forth with such frankness. That being said, things are a mess, I have forewarned of this mess for some time now.First, the lastest from Bloomberg: Ireland's Banks Will Need $43 Billion in Capital After `Appalling' Lending

March 31 (Bloomberg) -- Ireland’s banks need $43 billion in new capital after “appalling” lending decisions left the country’s financial system on the brink of collapse. The fund-raising requirement was announced after the National Asset Management Agency said it will apply an average discount of 47 percent on the first block of loans it is buying from lenders as part of a plan to revive the financial system. The central bank set new capital buffers for Allied Irish Banks Plc and Bank of Ireland Plc and gave them 30 days to say how they will raise the funds.

“Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin yesterday. “Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come.”

Dublin-based Allied Irish needs to raise 7.4 billion euros to meet the capital targets, while cross-town rival Bank of Ireland will need 2.66 billion euros.Anglo Irish Bank Corp., nationalized last year, may need as much 18.3 billion euros. Customer-owned lenders Irish Nationwide and EBS will need 2.6 billion euros and 875 million euros, respectively.

‘Truly Shocking’

The asset agency aims to cleanse banks of toxic loans, the legacy of plungingreal-estate prices and the country’s deepest recession. In all, it will buy loans with a book value of 80 billion euros ($107 billion), about half the size of the economy. Lenihan said the information from NAMA on the banks was “truly shocking.”

...

Capital Target

Lenders must have an 8 percent core Tier 1 capital ratio, a key measure of financial strength, by the end of the year, according to the regulator. The equity core Tier 1 capital must increase to 7 percent.

AIB’s equity core tier 1 ratio stood at 5 percent at the end of 2009 and Bank of Ireland’s at 5.3 percent. Those ratios exclude a government investment of 3.5 billion euros in each bank, made at the start of 2009.

...

Credit-default swaps insuring Allied Irish Bank’s debt against default fell 6.5 basis points to 195.5, according to CMA DataVision prices at 8:45 a.m. Contracts protecting Bank of Ireland’s debt fell 7 basis points to 191 and swaps linked to Anglo Irish Bank’s bonds were down 3.5 basis points at 347.5.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A decline signals improving perceptions of credit quality.

State Aid

If Allied Irish can’t raise enough funds privately, the state will step in with aid, Lenihan said. It is “probable” the government will then end up with a majority stake, he said.

...

Ireland may not be able to afford to pump more money into the banks. The budget deficit widened to 11.7 percent of gross domestic product last year, almost four times the European Union limit, and the government spent the past year trying to convince investors the state is in control of its finances.

The premium investors charge to hold Irish 10-year debt over the German equivalent was at 139 basis points today compared with 284 basis points in March 2009, a 16-year high.

Ireland’s debt agency said it doesn’t envisage additional borrowing this year related to the bank recapitalization. It is sticking to its 2010 bond issuance forecast of about 20 billion euros, head of funding Oliver Whelan said in an interview.

“The bank losses, awful as they are, represent a one-off hit. It’s water under the bridge,” said Ciaran O’Hagan, a Paris-based fixed-income strategist at Societe Generale SA. [What is the logic behind this statement? Has the real estate market started increasing in value? Are the banks credits now increasing in quality? Will the stringent austerity plans of the government create an inflationary environment in lieu of a deflationary one for the bank's customer's assets???] “What’s of more concern for investors in government bonds is the budget deficit. Slashing the chronic overspending and raising taxation by the Irish state is vital.” [This is a circular argument. If the government raises taxes significantly in a weak economic environment, it will put pressure on the bank's lending consituents and the economy in general, presaging a possible furthering of bank losses!]

 

and...

 

Juckes Says Outlook `Frightening' 
March 31 (Bloomberg) -- Kit Juckes, chief economist at ECU Group Plc, talks with Bloomberg's Linzie Janis about the outlook for Ireland's banks after the government set out plans to revive the country's financial system.

Now, notice how prescient my post of several months ago was, The Coming Pan-European Sovereign Debt Crisis: 

The following is a BoomBustBlog subscriber contribution by site member shaunsnoll. The BoomBustBlog team did not work on, nor review this analysis in any way whatsoever, but I feel that some subscribers may find it of interest. It is a small biotech company with marquis, name brand directors, proportionately large cash holdings and a bevy of assets yet no operations. All paying subscribers may access the file. Enjoy! 

File Icon member contribution analysis

from the author: This is a very simple idea, a very small company and is perhaps the most pure "dollar for .50" I've seen in awhile.  You will be able to know if you like it or not in about 15 minutes.  

I will be releasing additional free and subscription content throughout the day.

This site (freebuck.com) came up in a Google search this morning, and it was just full of good cheer. Enjoy! In the future (if the guy is reading this), please link back to the blog).

2010 will also be challenging for G7 Sovereigns as they TRY to rollover inconceivable sums of existing debt while borrowing NEW money to pay for the WELFARE states’ spending. Trillions of dollars of borrowing challenges lie directly ahead; let’s look at some illustrations of the rollover requirements for Germany, France, Portugal, Ireland, Italy, Spain and Greece fromwww.newyorktimes.com and Reggie Middleton’s Boom Bust blog

;

 

These are just the rollover requirements for the United States and do not include NEW BORROWING of $1.6 TRILLION.  So, a total of OVER $3.5 Trillion is required, providing that the deficits are as projected by the CBO (are they ever accurate?).  That’s almost $300 Billion a month, or $10 Billion a day (10,000 million a day).  Mind numbing numbers!  Inconceivable sums.  Now let’s look at European rollovers from Reggie Middleton:

Think of the US issuance and add this to it.  Where will the money come from?  The printing press in one form or another.  That’s just the rollovers; now let’s look at NEW issuance to cover 2010 DEFICITS from www.forbes.com:

This is called INSANITY.  Only IndiaChina and the emerging world are growing in REAL terms, the rest of the borrowers are DEADBEAT welfare states with shrinking incomes and economies, when properly adjusted for inflation.  How the US and Europe are going to navigate the rest of the year without some MISHAP is inconceivable.  That will be the appearance of the “when HOPE to FEAR” moment we are looking for in 2010.   This DOES not include BANK and brokerage debt (totaling OVER a trillion dollars) which must roll.   

Well, the reason why it seems like China is growing in real terms is because they are blowing a BIG BUBBLE! It is not sustainable, and when it pops it will actually push them back some. See

 I actually suggest you read the entire post, for although some of the charts and info are dated (the circumstances have changed somewhat) and other bits of info are anecdotal, it does give a good background of why anyone should be bearish - http://www.freebuck.com/articles/tandros/100326tandros.htm 

If this article goes viral around the web, I wouldn't be surprised if the euro tanks and several European sovereign states' spreads blow out. I have busted several of them in another of a long series of "creative" economic forecasting schemes to fudge the appearance of "austerity". 

Well, its official (sort of). Greece, a member of the European Union, will probably join the ranks of countries like Latvia (where policies are limited by the choice of the currency regime), Iceland (where the crisis has resulted in a very heavy external debt burden), the Ukraine (which is still affected by financial and political fragility) and a bevy of third world and emerging market countries in distress from the (not very) esteemed club of IMF financial aid recipients. What does this portend for the Euro? Well, I have blogged earlier in the year that the Euro's credibility is now highly suspect and those pundits who dared contemplate the Euro potentially replacing the dollar as the global reserve currency now see the folly of their ways. The chances of a break-up are significantly higher and quite realistic. Credit Agricole's currency strategist puts it succinctly:

“If Greece goes with the IMF, that says something terrible about the political process within Europe,” said Stuart Bennett, a senior foreign-exchange strategist at Credit Agricole Corporate and Investment Bank in London. “This undermines any confidence in the currency."

Greece will probably end up defaulting on their debt, with or without the aid of the IMF, and they will probably have good company with several other EU members. I say so, and so does UBS Economist Donovan.

“I think it’s in an impossible situation,” said Donovan, who is based in London, in an interview with Bloomberg Radio today. “Europe has failed to clear its first serious hurdle. If Europe can’t solve a small problem like this, how on earth is it going to solve the larger problem, which is the euro doesn’t work. It’s a bad idea.”

How dare I make such a proclamation? Well, because I am telling the truth based upon facts and the many forecasts from the various sovereign nations are basically based upon lies, fiction and farce! As it is look at how the market is viewing the Greek tragedy:

European governments have yet to agree on how to fund any rescue for Greece, which says it will struggle to pay its debts at current market interest rates. While Prime Minister George Papandreou announced a 4.8 billion euro ($6.4 billion) austerity package on March 3, the extra yield that investors demand to hold Greek debt over German counterparts has since risen.

The spread was at 324 basis points today compared with 316 points at the start of the month. The euro fell 1 percent today to $1.3358, extending its decline this year to 6.7 percent.

I am willing to bet the "market" has not taken a strong, hard, objective look at those proposed austerity measures and uncovered the secrets that I am about to reveal. If they have, these spreads would have been blown out much wider. 

A German finance official said yesterday that both countries may agree to involve the IMF. Papandreou said March 19 that Greece, which needs to sell about 10 billion euros ($13.4 billion) of bonds in coming weeks, is a step away from not being able to borrow and may need to turn to the IMF if European aid isn’t forthcoming.

Europe’s fiscal crisis shows the need for the euro region to create a common fiscal policy, former U.K. Chancellor of the Exchequer Norman Lamont said in an interview in London today.

“That would be the logical step,” Lamont said. “I don’t think they are prepared to do that, and without doing that I think the euro is a contradiction, a currency without a state.”

Bingo! The man hit the point right on the head. There are too many chiefs and not enough Indians.

I want to visually and verbally demonstrate what an absolute joke European economic estimates have been throughout this crisis, and more importantly how politicians and sovereign states are interpreting this joke in such a way that can deliver a punch line that can most assuredly end in sever global recession, or worse. This document/blog post alone should serve to sink the Euro and blow out CDS spreads for several European sovereign. Why? Because the truth hurts and the truth is not what has been coming from European sovereign states as of late.

The IMF and the EU have been consistently and overtly optimistic from the very beginning of this crisis. Their numbers have been dramatically over the top on the super bright, this will end pretty, rosy scenario side - and that is after multiple revisions to the downside!!! We can visit the US concept of regulatory capture (see How Regulatory Capture Turns Doo Doo Deadly  and Lehman Brothers Dies While Getting Away with Murder: Regulatory Capture at its Best) for the EU, but due to time constraints we will save that topic for a later date. To make matters even worse, the sovereign states have taken these dramatically optimistic and proven unrealistic projections and have made even more optimistic and dramatically unrealistic projections on top of those in order to create the illusion of a workable "austerity" plan when in reality there is no way in hell the stated and published plans will come anywhere near reducing the debts and deficits as advertised - No Way in Hell (Hades/Tartarus/Anao/Uffern/Peklo/Niffliehem - just to cover some of the Euro states caught fudging the numbers)!

Let's take a visual perusal of what I am talking about, focusing on those sovereign nations that I have covered thus far.

A recent ZeroHedge article (Bank Of America Can Not Deny It Used Repo 105, Response From PricewaterhouseCoopers Pending; The BofA QSPE's ) probes the possibility of BofA engaging in Repo 105-like activities in regards to their QSPEs (off balance sheet vehicles). ZH does seem to uncover a lot of dirt these days. After reading the article, I think it is worth blog fans time to delve deeper into the off balance sheet world of BofA. Here are some older blog posts that ask the hard questions and raises some additional ones. 

 And the next AIG is... (Public Edition, and yes, I know there is a typo in Mr. Tizzio's name) Free registration required to access the naked swap note.

I've been telling readers and subscribers that the housing market has a considerable amount to fall before we reach income parity. With income currently falling along with rising underwriting standards, that point is actually being pushed even farther into the (event) horizon! We are now at a point where interested parties would be remiss in not pursuing blogs (both in addition to and instead of the mainstream media) to get the nitty gritty analysis on a wide variety of topics. With that being said, I have finally decided to bite the bullet and expand BoomBustBlog by accepting partners in a bid to grow the business. Lethargic media and financial concerns, look out, here comes the BLOGS!!! I am open to ideas and suggestions. Interested parties may contact me here.

From the WSJ.com: Home Resales Drop

The latest data on the housing market underscored its fragility and showed that a glut of homes for sale and a wave of foreclosures and fire sales are holding down housing prices...

Sales of existing homes fell 0.6% in February from a month earlier to a seasonally adjusted annual rate of 5.02 million, the National Association of Realtors said...

The median price for an existing home was $165,100 in February, down 1.8% from February 2009, the Realtors said. Distressed homes, generally sold at discount, accounted for 35% of sales last month.

A separate report Tuesday from Federal Housing Finance Agency showed that house prices fell 0.6% in January and December's numbers were softer than previously reported. The FHFA index -- which tracks the prices of the same houses over time, but only those sold to or guaranteed by Fannie Mae, Freddie Mac or the Federal Home Loan Banks -- is 13.2% below its April 2007 peak.

Inventories of existing homes increased 9.5% at the end of the month to 3.59 million available for sale, the Realtors said. That represented a 8.6-month supply at the current sales pace, compared with a 7.8-month supply in January.

 Of course this isn't news at all to the Green Shoots disbelieving BoomBustBlog subscriber. Excerpts from previous posts over the last quarter that ran in direct contravention of both mainstream media and sell side analyst reports are below:

 The chart below illustrates the seasonal ebbs of month to month price changes.  On a month to month basis, we see hills in the spring and summer and valleys in the fall and winter. During the onset of the bursting of the (first) bubble, this cycle was compressed, but was still there. and lasted throughout the bubble. With the onset of the government stimulus (ex. housing credits and MBS market manipulation), the peaks were significantly exacerbated. Now we are entering into the winter months again, and guess what's happening, as has happened nearly every winter cycle before. The only difference is that this dip is extraordinarily steep! I would also like to add that the month to month price changes coincide exactly with the S&P 500 move downward and upward for 2008 and 2009, to the MONTH! What a coincidence, huh? If this relationship holds,,,, well you see what direction the month to month lines are going and how steep they are, don't you?

csmtmlong.png

  image027.png

As you can see, the residential housing uptrend is now apparently over, and we are resuming the downward decent.

Let's look at the improvement in delinquencies and losses as compared to home prices in the grand scheme of things, a birds-eye view so to speak...

janimage032.png

For data heaving presentations and analysis, feel free to click the links below.

Reality Check for Bank Investors, Mortgage Investors and Home Buyers (March 10th)

It's Official: The US Housing Downturn Has Resumed in Earnest (March 2nd)

It's HELOC Deja Vu,All Over Again (January 19th)

A Fundamantal Investor's Peek into the Alt-A Market (Jan 14, 2010)

Deflation, Inflation or Stagflation - You Be the Judge! (January 12th)

If Anybody Bothered to Take a Close Look at the Latest Housing Numbers...

(December 30th, 2009)

Housing sales and prices come in lower than estimated! What??? (December 24th)

Residential Lending Credit Losses Worsen as Unsustainable Government Support Proves... Unsustainable (December 21st)

The Truth! The Truth? Banker's Can't Handle the Truth!!!

On the Latest Housing Numbers (November 24th)

Monday, 22 March 2010 19:00

Newscan from the Weekend Past

Written by

Comments on global news from the weekend past...

Bloomberg.com:

  • $7.88 billion of slices underwritten by Deutsche Bank under downgrade review since underlying CMBS have been downgraded (CDOs are MAX CMBS I Ltd. Series 2007-1 and Series 2008-1), S&P has already downgraded 2007-1 to BB+
  • A BlackRock presentation stated that Deutsche Bank's CDO portfolio does not forecast for tranche losses
  • The MAX CDOs are among the Federal Reserve's holdings in Maiden Lane III
  • AIG provided Deutsche Bank with $5.61 billion in collateral before the Maiden Lane III transfer

FT Article: Merkel v. Greece Round 239,084.67 (Ding, ding) @ http://www.ft.com

  • Merkel insists Greece has not asked for money, and Greece does not need any [Let's permanently attached this to Merkel's credibility rating]
  • European Commission and IMF officials are far from same page as Merkel
  • The article wasn't dense with info, which is not unusual considering the subject matter, but what is clear is that the bazooka everyone was talking about has no trigger, and probably loaded with more baby powder than gunpowder!
  • That is going to be a big issue with Greek debt maturing in April if they have no revenue to pay it off

FT Article @ http://www.ft.com

  • British Airway strikes did nothing to dampen travel plans over the weekend
  • Examples like this are calling the union's bluff, they are not stopping society, potentially leaving room for union break ups by private companies, sovereigns and municipalities if they choose so, this could be a blip on the radar or an emerging trend, so something to continue to watch

I will start posting more news topics of interest and welcome readers to forward research and investment ideas at will. Here is the crop from last week. I will post topics from the weekend later on today, and as usual will randomly comment on daily news events.

From Alliance Bernstein:

  • Core Intermediate Producer Prices have taken 6 months to rise 5.2% annualized, recession of 2002 took 2 years to reach same level
  • Operating Rate hit low of 65.4% last year and has only risen to 69.4%, still short of historical threshold causing rise in raw material prices (74%)
  • Increases in foreign operating rates have started to indicate US may now be a price follower instead of price leader
  • The Fed cited lack of resource utilization as reasoning for maintaining record low rates, as these concerns begin to wane Alliance Bernstein sees easing of emergency Fed policy

Bloomberg.com:

  • Christina Romer, Peter Orszag, and Tim Geithner have predicted unemployment will settle in 2010 at around 9.7%, citing poor job conditions
  • Federal deficit projections for 2011 & 2015 are $1.5 trillion & $751 billion respectively, White House officials cite Bush's medicare and income tax cuts for allowing deficit insanity

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.

 We have finished our review of the Italian "Austerity" plans to whip its debt load into shape. As with Greece (see "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!), we have found it wanting. Believe it or not, the biggest issue is the credibility of the government. They stretch the facts, assumptions and gray areas to the point where you tend to doubt everything else. It is almost as if they believe no one will actually read what they have written, which very well may have been partially true in the past. Alas, that was the past and this is the present. Information, and to a lesser extent, knowledge travels through the web at the speed of atomic particles.  On that note, I release to my subscribers the pdf  Italy public finances projection 2010-03-22 10:47:41 588.19 Kb.

For those that don't subscribe, I would like to make clear that my assertions of flagrant and unsubstantiated optimism on the part of European governments stem from how quicly they feel their economies will grow despite the fact that they failed to see this maelstrom coming in the first place.

This is Italy's presumption of economic growth used in their fiscal projections: