Baltics may choose devaluation over euro

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Baltics may choose devaluation over euro

Postby theeuro on 17 Nov 2008, 17:25

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.''
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Re: Baltics may choose devaluation over euro

Postby finnwinter on 19 Nov 2008, 07:50

From what I hear most Estonians do not want the euro. I heard this quote... `Why would be jump from one union right into another?´ Distrust looking both east and west is justifiably deep. I have heard the question... ´Why can´t we just keep the kroon like Sweden, Norge and Danmark do. Estonian currency is much more beautiful too. And lats are more beautiful too. I have heard much baltic complaint about how ugly euros look and feel. No aesthetic appeal. I agree.
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Re: Baltics may choose devaluation over euro

Postby blackev on 20 Nov 2008, 01:34

From what I hear most Estonians do not want the euro. I heard this quote... `Why would be jump from one union right into another?´ Distrust looking both east and west is justifiably deep. I have heard the question... ´Why can´t we just keep the kroon like Sweden, Norge and Danmark do. Estonian currency is much more beautiful too. And lats are more beautiful too. I have heard much baltic complaint about how ugly euros look and feel. No aesthetic appeal. I agree.


Not quite sure what your saying here finnwinter can you explain what you mean?

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Re: Baltics may choose devaluation over euro

Postby Miguel.mateo on 20 Nov 2008, 04:30

Regardless how "ugly" the euros are (that is questionable and a matter of taste, angle) none of the Baltics countries have the choice "to adopt/or not to adopt" the euro. They will have to adopt it, it is just a matter of when. The same applies to Sweden. "Unfortunately" Denmark and the UK do have the right to choose, because the moment they joined the EU, a change in the currency was not mandatory.

Anyway, how beatiful or ugly a currency design is should be the least thing to take into account to decide to join the Eurozone or not. Look at all the financial problems recently, read stories about how bad it would be if certain European countries were not in the Eurozone. There are very good recent analysis and simulations of how bad would it be to Italy and Malta for example; just because they have the euro they have pass through this crisis in by far better shape than other countries.

I honestly believe that if the ECB gives the opportunity to all the baltics countries right now to join the Eurozone, regardless of their economic problems, they will all accept it without blinking an eye.

My two yen worth opinion ...
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Re: Baltics may choose devaluation over euro

Postby melitikus on 17 Oct 2009, 19:04

According to a report published some weeks ago by the Estonian Central Bank, all looks like that Estonia is going to be the next country to join the eurozone, probably on 1st Jan 2011
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