Marge Tubalkain-Trell, Baltic Business News
Lithuania, Latvia and Estonia may devalue their currencies next year, risking a delay in their adoption of the euro, as they seek to stave off a recession, according to Bank of America Corp., Bloomerg reports.
Inflation that's three times the rate in the 15-nation euro region and a slump in economic growth amid the global credit crisis will prompt the Baltic states to abandon their currency pegs in the second half, said David Hauner, a Bank of America strategist in London.
"They will keep the pegs at the current exchange rates well into 2009, but reset the rates to devalue against the euro later, when markets have calmed,'' Hauner said in an interview.
The Lithuanian litas, Estonian kroon and Latvian lat were little changed in the past three months in the exchange-rate mechanism in which they must participate before adopting the euro. Under the system, central banks keep the currencies within a 15 pct trading band against the euro.
Latvia's central bank Governor Ilmars Rimsevics said on Sept. 12 "devaluation is an absolutely unrealistic scenario.'' Lithuanian central bank Governor Reinoldijus Sarkinas was cited by the Baltic News Service as saying Aug. 19 the exchange-rate system shouldn't change "at all.''
Countries aiming to adopt the euro must spend at least two years in the European Exchange Rate Mechanism, or ERM-2, to demonstrate currency stability. Lithuania and Estonia pegged their currencies to the euro in 2004, the same year they entered the European Union. Latvia joined a year later.
"If they devalue, their ERM-2 test period is reset to zero, so they'll stay there for at least another 24 months before euro entry,'' Hauner said.
Lithuania's ambition to be among the first countries in eastern Europe to adopt the common currency was thwarted in May last year as inflation accelerated. Estonia and Latvia were also forced to delay the changeover.
Euro candidates need to cap inflation to within 1.5 percentage points above the 12-month average of the three EU nations with the slowest price growth. Inflation in Lithuania was 10.5 percent in October, and in Estonia 9.8 percent. In Latvia, it was 13.8 percent. The average rate in the euro region is 3.6 percent.
"If your real exchange rate is overvalued, there are two options: either devalue, or accept a recession to make inflation fall relative to the trading partners,'' Hauner said. "So the Baltics have the choice between a deep recession or postponing euro-zone accession. I think they will choose the latter.''



