Latvia's economic boom turns sour

[Vulpix]

Latvia's economic boom turns sour


BBC News: Over the last two years the small Baltic state of Latvia has collected a string of European records.

But unfortunately for the population of the country, they are not the sort of records that prompt lavish street celebrations and ticker-tape parades.
Up until a year ago the country, at various points, held the record for the fastest rate of wage growth, the steepest rise in house prices and the highest rate of inflation.

But just a few months on, things could not look more different.
Having seen its economy grow at a rate 11% in 2007, Latvia's GDP is now shrinking by more than 4%.

After a property boom, house prices are now falling at a faster rate than any other country in the world - down 24% in the last 3 months.

After years living in a world boom, Latvians are having to get used to a world of bust.

The once rampant economic 'Baltic Tiger' has been reduced to begging the international community for a loan of $6.5bn (£4.3bn).

Property bubble bursts

Crunching through the snow at a new apartment block on the outskirts of Riga is property developer, Viktors Savins, of ARCO Real Estate.

"From the top of the market, we've had to cut the price of these apartments by around 35%," says Savins surveying the half-finished development.

Savins' company began work on the four-storey flats in 2004 while prices were still rising, since then the property market has fallen by over 60%.

The housing bubble was fuelled by ordinary citizens who were encouraged to borrow up to 10 times their salary by foreign banks who in turn were feeding off the global supply of cheap credit.

"During the boom investors were in the market trying to fulfil their own 'American Dream' of getting rich quickly by doing nothing," says Savins.

But with unemployment set to double to over 10% next year, many Latvians are for the first time beginning to understand the true meaning of the words 'negative equity' and 'repossession'.

Killing the stag

Riga's old town is populated by buildings from various episodes of foreign occupation - from the Germans in the 12th century through to Latvia's time as part of Soviet Union during the last century.

But since independence in 1991, a different type of foreign invader has occupied the city's cobbled streets.

Large groups of young men on stag parties began coming to the capital in the early part of the decade as the country was pulling away from the Soviet Union's shadow.

Riga provided the three essentials for the original Eastern European stag: cheap beer, inexpensive flights and a wide selection of strip clubs.

The local currency, the lat, is pegged to the euro and so during the early part of the decade it offered visitors from the UK a very attractive rate.
But as the pound has fallen against the euro over the past year, bars in Riga have seen takings slump as tourists opt to holiday at home.

Raimonds Tomsons is the sommelier at Vincents, one of Riga's most expensive restaurants and has seen the economy boom over the past few years.

"These times are very tough - many restaurants are closing as they simply don't have any customers - some only have three people coming in a day. It is very difficult to survive," he said.

Expensive beer

Leaning on the bar at Paddy Whelan's Irish bar in centre of Old Riga is Ivo Grubanov who organises tours for a British firm, Baltic Holidays

"We used to be on the cheaper side, but if you're a British tourist or a Spanish tourist Riga has got expensive," he said.

Grubanov caters for everyone from retired couples to rowdy stag parties, dispensing wisdom on everything from 12th century architecture to the cheapest city drinking holes.

And he's well aware of the cost that the Latvian government's insistence on staying pegged to the euro is having on his customers.

"It breaks my heart to bring young lads to a bar and tell them that a pint of beer costs five or six pounds," he says

"There's no good reason to have the lat to be so artificially high, and it would be much more sensible if we could float our own currency."

But with the Latvian government determined to meet the criteria to allow them to officially adopt the euro in 2012, it seems that it will be businesses like Ivo's that will continue to suffer.

'Orgy of credit'

The skyline of Riga is dominated by several glass-clad towers rising high above the more traditional pitched roofs of Riga's old town.

These shiny constructions house the headquarters of banks from across the Baltic Sea - mainly from Sweden and Denmark.

It's these institutions that are blamed for fuelling the recent credit boom. But it was a run on a domestic bank, Parex, that first pushed the government into the arms of the IMF.

LATVIA'S RECORDS
Highest inflation rate - 17.9% in May
Highest growth rate - 10.3% in 2007
Biggest fall in growth in Q3 2008 - minus 4.2%
Fastest falling house prices in the world in 2008

Depositors in the bank withdrew their money after rumours circulated that the bank was close to collapse, forcing the government to bail it out.

For Alf Vanags, from the Baltic International Centre for Economic and Policy Studies, the origins of Latvia's latest economic palpitations are increasingly obvious.

"Over the last few years there has been an orgy of credit," says Vanags.
"People have been borrowing on the assumption that the boom years would go on forever - but now they've stopped and they're having to deal with it."

Snowstorms and arrests

After years of mild winters, Latvia is currently experiencing its coldest periods in years, with the latest snow storm leaving three people dead
Along with the miserable weather has come a new crackdown by the
government on people they see as deliberately destabilising the economy.

Over the past few weeks, a university lecturer and a musician have been arrested after publicly casting doubt on the country's economic future.

And so, nearly twenty years after escaping the clutches of Soviet domination, it seems that Latvia's biggest challenge may yet be to come.

"I believe that it's like the turbulence you get in an aeroplane, we just need to hold tight and get through it," says Viktors Savins.

While he may well be right, it would seems that there are plenty of bumps ahead for Latvia in what is increasingly looking like a very hard landing.

[Absinthe]

I had been discussing it this summer, basically on a more practical and everyday level.

My friends told me an average monthly salary is about 700e (as low as it is in Greece), but the cost of life is becoming higher everyday.

Housing prices have doubled or tripled over the last years, let alone that the owner will rent you a house that's practically bare of closets, storage bins, sinks and all that -just the floor and the walls, so to speak, and he'll say that if you want them you should pay for them yourself.

I heard public transportation in Riga is becoming more and more expensive, it costs about 15 euros monthly for just one bus line, only to be used during week days.

Beer, food and drinks have also become extremely expensive. About 6 (?) years ago that my friend initially moved to Latvia, he was praising the inexpensivess of the country and kept talking about how prices were reasonable, especially when it came to alus.

What's worse, they told me that the public insurance system is falling apart, state pensions are non-existent, and nobody cares -because the average life span is about 65 years.

All that sounds very, very gloom. I hope Latvians will find ways to cope with the situation but I fear that entrance in the EU may prove to be a suicidal act, just like it did for the rest of us

[Inese]

Yes, the situation is not good in Latvia right now. There is a big economic crisis and the boom has ended. But it was predictable because the boom was like a air balloon in the last few years. Simply too much in a too short time.

The only good thing is that the amount of binge-drinking tourists is decreasing. It was really horrible sometimes. Tourists (from Great britain predominantley) came to Latvia primarly for cheap beer, long parties and fast sex. Many of them behaved not well when they had some alcohol in their blood. It is a two sided face because Riga and other large cities need tourism but native people grew angry because of the respectless behaviour. Not seldom drunken tourists assault people in the streets at night because they think Latvians are easy to get and living sex objects.

It´s good if Latvia has more serious tourists now, interested in history, nature and architecture, and less sex-party people. Do they think we are a country like Thailand or Vietnam??? Riga is not Khao Lak!

[GUSTAVUS ADOLPHUS]

It´s good if Latvia has more serious tourists now, interested in history, nature and architecture, and less sex-party people. Do they think we are a country like Thailand or Vietnam??? Riga is not Khao Lak!

When I went to Riga this summer I started talking to a Flemish guy I met at the airport. A while into the discussion he asked me if I was one of those guys who just went there to binge, and I couldn't help but feel ashamed of my fellow (Western) Europeans.

We live in a degenerate society, unfortunately, and we have let the Jews devaluate human life for too long.

Luckily, my new found friend was as interested in history as me.