Wednesday, June 3, 2009

Latvia Finds Itself In Currency And Funding Crisis, Kills EM Rally

In an overlooked piece of data, indicating that the 3 month rally is likely done, yesterday EU-member Latvia saw its overnight interbank rate surge to a record 16.4% while the overnight deposit rate double to 24% after the country was unable to sell any debt securities at a local debt auction, according to its main stock exchange. The Latvian Treasury had offered to sell 20 million lats ($20 million) of July maturities, 10 million of September, December and June 2010 paper. None of this paper found any buyers.

The fear that this problem is not contained and will spread caused the EM green shoots rally to stop and backtrack.
Emerging European stocks were hit harder than most on fears that Baltic volatility caused by a possible currency devaluation could reverberate in the region.

While Latvia's government strongly opposes a devaluation, some analysts believe such a move is inevitable with the country's economy expected to contract about 18 percent this year.

Markets reacted to the fears as credit default swaps -- the cost of insuring Latvian debt for five years against default -- rose 10 basis points on the day to 638.2 bps according to consultancy CMA Datavision. They had widened 23 bps on Tuesday.

Elsewhere on the Baltic front, Lithuania is concluding a roadshow for a planned 500-million to 600-million euro bond but analysts say the issue may face a rocky ride, given the problems dogging its neighbour.

As Zero Hedge has long suspected, the next major shoe to drop will likely come from some place east of the Rhine river. Luckily for Europe, Latvia has its own independent currency. However the question of Spain, Italy and, especially, Greece lurks in the shadows, and it is only a matter of time before these three countries follow suit. There is only so many countries the IMF (US) can bail out.

hat tip Shawn
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