This is somewhat bizarre.
When Latvia boasts the second highest inflation in the European Union; when real estate prices are gradually slipping down; when rumors of the currency devaluation have been circulating since this spring and continue to persist; when the country’s current-account deficit is at a critical stage, the Wall Street Journal comes up with this:
Baltics Are Fertile Ground for Private Equity
The Baltic countries of Lithuania, Latvia and Estonia are revving up their economies — and emerging as new hunting grounds for private-equity firms looking to make deals.
All three former Soviet republics joined the European Union in 2004 and have experienced a consumption boom that has driven a surge in economic growth. Estonia and Latvia were the two fastest-growing economies in the EU last year — Estonia’s gross domestic product grew 11.4%, while Latvia’s economy surged 11.9%.
But that strong growth has fueled inflation and driven current-account deficits to record highs. The environment demands caution from private equity and fund managers as they go about choosing their deals.
“The most likely scenario is a soft landing, although we are concerned about Latvia and the risk of psychological contagion in the other markets,” says Marcus Svedberg, chief economist at Nordic fund manager East Capital.
Here’s a bit of a different picture:
Bini Smaghi has it right, the key question for the EU 10 countries is how to maintain the levels of “catch up” growth which would enable them to close the gap in living standards which exists between East and West, and how to do it, so to say, when they don’t have the raw material (in terms of labour supply) to hand to aid them in this.
Thus in many ways the European Central Bank might be thought to be increasingly giving the impression they would not be displeased if the Baltic nations and Bulgaria drop their exchange-rate pegs because they contribute to increasing economic imbalances, according to a research note from Danske Bank (PDF):
“It seems that the ECB is suggesting what would have been unthinkable a year ago: that it is time to change the exchange- rate policies in the CEE countries with exchange-rate pegs,”
