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Bonds News

CORRECTED - Latvians worry as economy goes from boom to bust

(Corrects surname of businessman in paragraph 17)

RIGA, Nov 21 (Reuters) - Jana Nesterovica is alarmed and confused by the sudden economic collapse that has prompted Latvia to ask for international help after years of boom.

One day after the government asked for aid from the International Monetary Fund and the European Commission, Nesterovica changed local currency into euros because of fears the economic slide will continue.

“Every day we rush to banks to exchange money from lats to euros and then back. We feel confused and worried,” the 25-year-old art gallery manager said.

The former Soviet republic was once one of the fastest growing economies in the European Union but has quickly gone from double-digit expansion to full-blown recession.

The government has taken over the second-largest bank to save it from a run on deposits and the central bank chief says the government would use international aid as a cushion to strengthen the stability of the lat.

The situation is a sharp contrast to the credit-fuelled growth that led a prime minister at the start of last year to speak of the “seven fat years” awaiting his people.

The lat is pegged to the euro and the authorities have strongly denied any possibility of a devaluation.

“Rationally we understand that these could be just rumours spread by uninformed people, but when they circulate around, it is hard not to give in to them,” Nesterovica said.

In Latvia, which is still one of the EU’s poorest members, such talk can get people in trouble.

Under powers granted last year under a new law, the Security Police said this week said it was investigating two residents for allegedly making statements that could undermine financial stability. If found guilty, they could face a jail term.

EASY MONEY

Latvia and its northern neighbour, Estonia, are extreme examples of how easy credit from Nordic banks -- big players in the Baltic market in recent years -- can create imbalances.

Benefits have come in the form of new shopping malls, offices and blocks of flats, along with a sense that prosperity has arrived after 50 years of hardship under Soviet rule.

But both countries have also suffered soaring prices and surges in imports.

The economic downturn is expected to correct these problems, but is also likely to push up unemployment. Latvia and Estonia fell into recession this year while growth has slowed sharply in Lithuania, the southernmost Baltic state.

“It (the recession) is not a surprise, as this credit boom should have led to these consequences sooner or later,” said Dainis Demeters, a construction foreman.

Even if it was expected, the swift reversal of economic fortune is proving tough for Latvia’s business community.

“It is very much affecting us. Sales in recent months are down 50 percent over the last year,” said Davis Maksins, who sells nearly new U.S. cars and car spare parts.

“Generally speaking, we are at 2006 sales levels. We have had a setback of at least two years.”

He said his small firm had already cut staff and was uncertain about the future although he believed the company would survive the downturn because it has not debt.

Latvians are already starting to change their shopping habits, according to retailers.

“A year ago people would buy whatever they wanted but now people are looking more at discount deals,” said Zane Enina, spokeswoman for supermarket group Rimi.

However, sales were still up 15 percent so far this year, she added.

For a story, click on [nLL699558] (Reporting by Patrick Lannin, additional reporting by Jorgen Johansson and Gunta Gasuna; Editing by Timothy Heritage)

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