Hard Landing in the Baltics?

In Bloomberg today:

Baltic States Risk `Hard Landing,' Devaluation, Nordea Says

By Milda Seputyte and Aaron Eglitis

Oct. 11 (Bloomberg) -- The three Baltic countries are at risk of a ``hard landing'' that could trigger speculation their currencies may be devalued, Nordea Markets said.

Slowing credit growth could decrease domestic demand, raise unemployment and lead to a fall in property prices, Roger Wessman, an economist at Helsinki-based Nordea, said in an e- mailed presentation.

Economic growth in Estonia, Latvia and Lithuania accelerated as cheap credit in foreign currency boosted demand for imports, widened their current-account deficits and spurred inflation to more than three times the levels in the euro region.

``Economic growth boosted by foreign loans cannot continue forever,'' Wessman said in a conference in Vilnius today, according to an online business news service VZ.LT. ``If the decline will be very sharp, a devaluation may be needed to restrain the decline and to help the economy revive.''

The current economic situation in the Baltic states is similar to the developments before the economic slump in Sweden and Finland in the early 1990s, Wessman said.

Sweden and Finland, like the Baltics, had artificially low interest rates and borrowed in foreign currency, fueling a boom, he said. This was followed by a downturn that saw real estate prices drop and unemployment rise. Both countries devalued their currencies.

Housing prices in Helsinki fell by 50 percent from 1988 to 1992, according to Wessman. Unemployment grew to 21 percent in 1992 from about 4 percent in 1990.

Devaluation Fears

Fears of devaluation could cause consumers to switch their loans from euros to domestic currencies, depleting foreign currency reserves and forcing a devaluation, Wessman said.

Estonia, Lithuania and Latvia, which use the currency-board system rather than allowing their currencies to float freely, have already dropped plans to be among the first of the 2004 European Union entrants to switch to the common currency after inflation accelerated beyond limits required for adoption.

Growth was twice as fast in countries with pegs than in countries such as the Czech Republic and Poland, which allow their currencies to trade freely.

Latvia's inflation rate was 11.4 percent in September, Estonia's rate was 7.2 percent and Lithuania's was 7.1 percent. That compares with a 1.7 percent average rate in the 13 nations that use the euro.