How the poor can get poorer, and be OK about that

VILNIUS/RIGA (Reuters) - Moody's upgraded the outlook for Lithuania's debt rating recently, but that means nothing to people like Lijandra Garniene.

Sitting in a cramped one-room apartment in Vilnius, the mother of four, a former shop assistant in what was one of Europe's fastest-growing economies, remembers weeping in despair the first time she had to ask for a charity food parcel for her family. Her children are aged between 2 and 13.

"I could not actually say it -- I started to cry. They understood," Garniene, 32, told Reuters. "I was not ashamed -- but I felt so sad that I cannot earn enough myself to buy food for the children, but I had to ask for it."

As financial markets panic about the risks to the euro from laxer governments in southern Europe, the northern Baltic states are already in tight fiscal bandages as they experience Europe's most severe recession.

And the Baltic countries show how, with a passive, compliant population, the medicine of austerity goes down.

Economists say the worst may be over for the Baltics, but the human cost has been high: unemployment in Latvia is now the highest in the European Union -- at 22.8 percent in December 2009. Estonia has the third highest, after Spain, Lithuania the fourth.

Even if some kind of recovery is on the way, it would need to be a very high tide to lift the boats of people like Garniene or, in Latvia to the north, Valentina Pankova, who works in the laundry of an old people's home near Riga, the capital.

She earns just 100 lats a month, or just over $200, on a government scheme to help the unemployed.

As an unenviable crown from the crisis, Latvia set a world record by losing more than 24 percent of its economy in just two years -- a sharper contraction than America's during the Great Depression, according to U.S. analyst Mark Weisbrot of the Washington-based Center for Economic and Policy Research.

Describing Latvia's economic policy response as "19th-century-brutal" in a column in The Guardian last month, he argued its people are suffering under political pressure from other European governments keen to shore up their own banks.

He saw this as a factor behind the Balts' decision to make cuts rather than devalue their currencies and kick-start growth.

"A devaluation in Latvia could trigger the same result in Lithuania, Estonia, and Bulgaria, and increase defaults on the bad loans that these banks made during bubble years throughout the region," he wrote.

So far, those people who remain in the former Soviet states have been rigorously stoic, apart from an isolated outburst of protest in Latvia in January 2009. Many Balts are emigrating in search of work or aging quietly at home, so those who stay tend to remember Soviet days when they stood in line for anything.

"It's just as well that in many shops there are all sorts of discounts," said Pankova, 54. "You go into the shop, you choose cheaper things."

STABLE?

Moody's said on February 4 it sees less downside risk to Lithuania's 'BBB' investment grade bond rating, citing the country's tough budget measures in the wake of the crisis.

"The turnaround has come quicker than anyone had dared hope for," European Bank for Reconstruction and Development (EBRD) chief economist Erik Berglof told Swedish newspaper Dagens Industri about the Baltic states and east Europe.

"The Baltic states have a very difficult job in front of them with significant risks. But the situation has stabilized."

Despite its crisis, Estonia is on course to adopt the euro in 2011 thanks to a conservative fiscal policy. Lithuania is now even forecasting economic growth in 2010.

But governments in the region, which in the boom was pumped up to double-digit rates of growth by cheap credits from Nordic banks, may yet face pressures to come up with ways to stop people falling into poverty.

"We would not be able to survive physically without these food packages," the Lithuanian mother Garniene said of the aid she gets from Catholic charity Caritas. Her husband Sigitas lost his job as a construction worker when the property market collapsed. The family gets a total 2,000 litas ($835) a month, about a third of what they earned during the boom years.

Latvia is the only European Union country outside Romania to carry a "junk" bond rating. Its government has created a "100 lat" scheme, giving people work at a set wage of 100 lats.

"It is the absolute minimum," said Pankova, adding she was lucky she had no family to support and her flat -- with few modern comforts -- is relatively cheap to run.

HOLDING THE PEG

Even if a hoped-for moderate recovery materializes in 2011, the Baltic economies remain fragile at best -- Latvia's is still shrinking. The speed of a recovery will determine when Nordic banks like Swedbank and SEB -- the region's major financial players -- begin to cut their loan losses.

Latvia had to make its spending cuts to secure a 7.5 billion euro bailout from the International Monetary Fund and EU.

It needed that because, like Estonia and Lithuania, it decided to keep its currency pegged to the euro. Some economists, including Paul Krugman, a Nobel laureate in 2008, said devaluation would have brought a quicker recovery.

"It makes no sense to continue to shrink the Latvian economy, with no end in sight to the recession, simply to maintain the pegged exchange rate," agreed Weisbrot. "Argentina tried this from 1998-2002, also suffering its worst recession ever and pushing 42 percent of its households into poverty."

The Baltic governments and central banks argued devaluation -- which would be a 'nuclear' option for faltering euro zone members -- would cause more harm than good, due mainly to high levels of debt in euros run up during the boom.

As a result, Latvia is set to see a 2009 fall in economic activity of 18 percent and Estonia around 14 percent. Lithuania has reported a drop of 15 percent.

That's visible on one of Riga's main shopping streets, Krisjana Barona street, peppered with "to let" signs and sales signs advertising "50 percent off" or even "70 percent discounts."

OUT OF MIND?

But by and large you don't see the poverty in the Baltic capitals, where the streets still buzz with activity, and popular cafes and restaurants are often full.

It's the suburbs that can show most how property and construction, shops, restaurants and car dealers have been really hit.

At the Saliena property project just outside Riga, sales director Barny Edis points to empty, unsold houses. The ground is still muddy; pipes and construction material have been left lying around. Evidence of the past boom is down the road, where 200 houses that did sell are still occupied.

"It is tough. It's been tough for me, it's been tough for my family, but what doesn't kill you makes you stronger," said Edis, a Briton who brought his wife and two children to Latvia in 2007, just before the property bubble burst.

His company now has 46 houses remaining. Sixteen are completed and six have sold, but another 30 stand unfinished.

He said the company was selling one house a month, compared with four or five a month two or three years ago. He expects the market to pick up around October or November, or early 2011.

Other projects had similar problems: one developer built two tower blocks but abandoned the third half-built, leaving a naked skeleton of concrete and iron bars pointing to the sky.

OPPORTUNITY KNOCKS

As Latvians turn downmarket in their shopping habits, some businesses are, of course, capturing the opportunities: Guntars Lasis is selling goods from bankrupt companies.

In premises which used to house a menswear shop -- it went bankrupt -- he sells a hodge-podge of items including children's winter wear from upmarket Swedish company Polarn O. Pyret, stationery items, some furniture and other odds and ends.

"Lots of people come, many people show an interest and buy a lot," said Lasis. The crisis could be felt in many spheres, he said: people had to realize that to find a job they had to bring down their expectations of how much they could earn.

While entrepreneurs like Lasis can be found the world over, it is hard to envision many people in countries like Greece putting up as stoically with such austerity -- its farmers are already protesting, and strikes are planned.

(Editing by Sara Ledwith)