"If fundamentals are out of line you cannot maintain a fixed exchange rate, you’re going to eventually have a currency crisis," said New York University professor Nouriel Roubini, who forecast the U.S. recession two years ago, said in an interview from Moscow. "The Baltics are under pressure and Bulgaria’s currency board is under pressure. Current-account deficits in the Baltic states and Bulgaria put the countries at risk of currency crises that may lead to problems in banking and housing," Roubini said.
The currencies of the Baltic states of Latvia, Lithuania and Estonia have remained pegged to the euro as their economies suffer from a reduction in foreign credit and decline in consumer demand. Latvia’s lats gained 0.7 percent versus the euro this year, as the central bank maintained its regime of limiting the currency’s fluctuations. The Estonian kroon and Lithuania’s litas have barely moved as those countries maintain their pegs in preparation to adopt the euro. By buying and selling reserves, Estonia keeps its currency around 15.65 per euro, while the litas is held at 3.45 per euro. This type of fixed currency regime is often called a currency board.
"Given the economic conditions are getting worse, these pegs are under severe pressure and you have the beginning of a currency crisis," said Roubini, speaking from Moscow at a conference run by investment bank Troika Dialog.
"A currency crisis becomes a banking crisis, a housing crisis, a sovereign debt crisis. It becomes a corporate crisis because each segment in these economies has a large amount of foreign liabilities."
Latvia’s reserves fell 20 percent to $5.3 billion in the second half of last year, Estonia’s declined 5 percent to $3.9 billion and Lithuania’s slumped 13 percent to $6.3 billion.
The IMF "should have, like they did in East Asia and in other emerging-market crises, made it a condition of the provision of liquidity that they let the currency move," he added. "The Baltic currencies are overvalued."
Source: BalticBusinessNews.com/Aripaev.ee
