Broken on a currency board

8 October 2009 By Ian Campbell

A failed bond auction and a government struggling with budget cuts have again caused smoke to rise in Latvia. The Baltic state s real problem is a fixed and hugely overvalued exchange rate. Ten months after its first rescue attempt, the IMF should bite the devaluation bullet.

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The Bank of Latvia warned on October 7 that another wave of distrust is beginning to roll over Latvia because of what it called less than clear signals associated with the process of adopting the state budget.

The government has been seeking to make budget cuts as part of a E7.5bn programme agreed last December with the International Monetary Fund, to which the European Union and Sweden also contributed. The central bank also expressed its displeasure with plans being drawn up by Valdis Dombrovskis, the prime minister, to change rules on mortgage liability.

Stefan Ingves, the governor of the Swedish Riksbank, the central bank, warned on October 8 that Latvia must honour its agreements with international lenders.

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