Thursday, June 04, 2009

With what will I defend it with, dear Liza?

A cursory glance at the success rate of emerging countries attempting to defend their currency pegs in the last half century does not reveal a positive outcome here.

By Aaron Eglitis
     June 4 (Bloomberg) -- Latvia’s central bank pledged to
defend its currency’s peg to the euro as some investors shunned
assets linked to the Baltic nation on concern its economic
collapse will precipitate a devaluation.
     The bank “has explained and clearly said that it will
maintain the stability of the lats until the lats is replaced by
the euro,” it said in a statement on its Web site today. “It’s
clear that such a mechanism as a fixed currency exchange rate
allows the Bank of Latvia to achieve this policy.”
     The Baltic country, which is suffering the severest
recession in the European Union, is struggling to rein in its
budget gap in order to secure the continued payment of an
international bailout. Latvia’s economic collapse is threatening
the prospect of recovery in Sweden, known for its textbook
handling of its 1990s banking crisis, because the largest Nordic
nation’s banks are the biggest in the Baltic region.
     The situation in Latvia is “markedly worrisome,” Swedish
Finance Minister Anders Borg said in a statement on the
government’s Web site today. The economy shrank an annual 18
percent in the first quarter.
     Credit-default swaps linked to Baltic government debt rose
for a second day today. Contracts on Latvia soared 60 basis
points to 735, the highest since April 28, according to CMA
DataVision prices at 12:20 p.m. in London. Default swaps linked
to Lithuania climbed 35 basis points to 485 and Estonia rose
12.5 to 365.

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