Latvia Faces Bankruptcy
The current economic meltdown has put entire countries in trouble. Latvia is the latest country to face bankruptcy if it can’t get help.
The idea of a country going bankrupt as a going concern seems ludicrous. Unfortunately, it is not. The current economic recession is truly global and devastating. While many first world countries have the financial strength to withstand the economic beating, smaller countries do not. Iceland was the first country to go under, but more are on the way.
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Latvia is currently facing bankruptcy in June of 2009. The problem the country faces is one that is running throughout much of Eastern Europe. The economies and countries have come a long way since the iron curtain fell, but they are not strong enough to survive big down periods. For instance, the last quarter of 2008 saw the economy of Latvia contract at a large 10.4 percent pace. A 6.2 percent contraction caused the United States a lot of stress, so Latvia is not in a good position.
Unlike individuals or businesses, countries have another source for funding. The controversial International Monetary Fund is the proverbial bank of nations. The fund provides loans to countries in trying times and to help them improve their economies and way of life. The IMF is controversial, however, because it puts a lot of stipulations on the loans, effectively steering the economic policy of the borrowing state.
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In the case of Latvia, the IMF is requiring the country to keep the deficit under 5 percent of the GDP. The problem with this requirement is the economy is forecast to recede at a 12 percent clip. To fight it, the government needs to put funds into the economy much as the Stimulus Bill has done in the United States.
What will happen to Latvia? It is difficult to know, but there is a fly in the ointment for the IMF. Swedish banks are heavily invested in Latvia. Watching the country fall into economic ruin would not only be hard for them, but it could take them under as well and put Sweden in to trouble. This means you can be that Sweden is lobbying the IMF hard to adjust the terms of the loan.
How bad is the current recession? When countries are going under, you know it is bad.