* Baltic governments chose austerity over stimulus
* Protest was muted: populations used to hardship
* Contrasts with Europe's south where anger is mounting
* Some economists see stabilisation, but risks remain
By Nerijus Adomaitis and Patrick Lannin
VILNIUS/RIGA, Feb 10 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
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 Centre 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 ageing 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
Moody's said on Feb. 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 stabilised."
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 materialises 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
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
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.
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 realise 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)