[Marxism] Latvia gets the Argentina treatment

[Louis Proyect <lnp3@xxxxxxxxx>]

NY Times, May 24, 2009
Latvia Races to Cut Deficit to Keep to Its Bailout Deal
By CARTER DOUGHERTY

RIGA, Latvia — Many countries in the world have felt the sting of the 
economic crisis, but few can match Latvia for sheer pain. A harrowing 
contraction in the economy is reordering expectations for the future as 
the country’s leaders grapple with a credit-fueled boom turned to bust.

Two brothers, Matiss and Oskars Barkoviskis, see it every day as they 
make their rounds here in their borrowed Mazda pickup truck. In the 
three months since they founded a charity for feeding the poor, they 
have discovered a strong and growing demand for their services.

In just that time, the number of families they visit each week has 
nearly doubled, with new ones answering ads in Riga’s free newspaper 
every day. They started by delivering groceries down the dirt roads 
outside Riga and into decrepit, Soviet-era high-rise apartment 
buildings. But now they find themselves helping out families who live in 
apparently comfortable surroundings, but who can no longer afford to 
feed themselves.

“Before we started this project, I never thought people could live like 
this,” said Matiss Barkoviskis, 20. “There is a sadness that I did not 
expect.”

It is not hard to grasp what stands behind the sour mood in Latvia. 
Forced into the arms of the International Monetary Fund, the Latvian 
government is now slashing its budget and the wages of state employees 
in a bid to rebalance a society that had run badly out of whack.

Austerity is rippling down the social hierarchy, as the affluent cancel 
vacations, middle-class people fret about social descent, and Dickensian 
scenes of destitution multiply.

In Riga, the capital, abandoned construction sites, vast lots of 
repossessed cars and a new, utterly empty shopping mall testify to the 
misery. But the government’s tough medicine for the crisis, stiffer than 
Black Balsam, the syrupy herbal liqueur that is the country’s national 
drink, has defined the times.

Latvia is racing to halve an enormous government budget deficit, now 
estimated at 12 percent of gross domestic product, even as its economy 
is expected to contract by 16.5 percent this year. That is a condition 
of the $10 billion bailout by the I.M.F. that the European Union, of 
which Latvia is a member, also supported.

Prime Minister Valdis Dombrovskis, acutely aware that the previous 
government fell after Riga was shaken by riots in January, must now 
convince wary lawmakers that the country’s choices have narrowed to bad 
and worse.

“There is a growing awareness of what the problems are, but also what 
the alternatives are,” Mr. Dombrovskis said in an interview. “The 
alternative is not receiving international financing.”

The alternative, in other words, is default.

In better times, the global financial system would barely flinch at the 
idea of Latvian insolvency. But the other Baltic countries, Estonia and 
Lithuania, as well as Romania and Bulgaria and even Western stalwarts 
like Ireland all gorged on cheap credit and are all groaning under a 
heavy debt load. The last thing they want to see is a default, which 
could reignite a crisis that appears to be easing.

“Latvia is a reminder that there are other countries struggling with 
huge imbalances, though nobody has turned out as bad as Latvia,” said 
Lars Christensen, chief analyst at Danske Bank in Copenhagen, who has 
long warned of a convulsion in the region. “Some come pretty close.”

In the heady days after it gained membership in the European Union in 
2004, Latvia pegged its currency, the lat, to the euro in anticipation 
of eventually adopting the European currency. Its economy blossomed and 
Riga, blessed with its abundance of stunning Art Nouveau architecture, 
emerged as a kind of capital of the Baltics.

Euro-denominated lending exploded, to the point where 85 percent of 
household debt was held in euros. But that seemed immaterial at the 
time, since the euro would soon replace the lat as the country’s 
currency, or so it was thought.

The lat is still with Latvia, however, and so is a colossal problem of 
how to devalue the currency — the usual adjustment mechanism in a 
financial crisis — without creating a crushing debt burden. Rather than 
let the currency decline, the government has chosen what it calls an 
“internal devaluation,” in which wages are forced downward to restore 
the economy’s equilibrium.

In December, the previous government reduced wages by at least 15 
percent for most civil servants, and Mr. Dombrovskis is promising more. 
The government’s procurement budget was cut by a quarter, while the 
value-added tax increased to 21 percent from 18 percent. Exceptions for 
books and hotels fell away; excise duties on alcohol and gasoline rose.

The experience is weakening the bonds that Latvians feel for their 
state. Though proud of their heritage in language and culture, many now 
speak openly of emigration, and fading memories of citizens standing 
together with leaders to throw off Soviet domination 19 years ago only 
accentuate the alienation.

“Independence or bondage is an easy question to answer,” said Krisjanis 
Karins, a former Latvian economy minister. “This time it is not so cut 
and dried.”

Girts, a lanky 40-year-old doctor’s assistant, works three jobs in three 
hospitals for a monthly salary of $1,350 and spends half his income 
servicing a euro-denominated mortgage on his apartment.

The mood at Latvia’s state-run hospitals, he said, is now one of 
foreboding, as employees gripe that managers did not share in the pain 
of a 20 percent wage cut in January — one that covered all government 
workers — and will dodge another later this year. “I have very little 
faith left in the Latvian state,” said Girts, who asked that his surname 
be withheld for fear of retribution by supervisors. “I don’t know how 
much longer this can go on.”

For Latvia’s poor, the mood falls somewhere between bewilderment and 
frustration, as families struggle to comprehend why their world has come 
apart.

It did not make them rich, but Latvia’s boom over the past few years 
reached Aija Voitov and her husband, Juris, who live in a two-room shack 
heated by a crude metal stove down a dirt road outside Riga.

Though Mr. Voitov switched jobs from time to time, work was plentiful, 
and Mrs. Voitov had only to walk over to the nearby main road to find 
work at a big supermarket. Three months ago, Mr. Voitov lost his job at 
a food processing factory where he had earned $735 a month, a tiny 
enough sum. Since then, as the family scrapes by on state assistance, 
Mrs. Voitov confesses little comprehension of exactly what went wrong, 
only that in the past, things were better.

“It was normal, it was good,” Mrs. Voitov said. “There was plenty of work.”

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