Mike Collier in Riga -

Speculation about the nature of the economic "landing" expected in the Baltic states has been a favourite topic of conversation in Tallinn, Vilnius and Riga for months. As well as proponents of a "hard" or "soft" landing, there have been people like Morten Hansen at the Riga School of Economics hedging their bets with a "bumpy" landing prediction. But the latest statistics from Estonia suggest the landing has finally arrived and is of the "crash" variety.

On May 14, analysts at Capital Economics issued a statement saying that hopes for a soft landing in the Baltics had been "blown to pieces," while former Swedish central bank chief Bengt Dennis talked about the Baltic tigers "hiding in the bushes" and not knowing when they could be lured out.

Capital's assessment came on the back of preliminary data released in Estonia showing that the economy contracted by a massive 1.9% in the first quarter of 2008, leaving the annual rate of growth at a paltry 0.4%, well below even the most pessimistic predictions. "The news from Latvia and Estonia has been nothing short of disastrous," Capital says.

"The Latvian economy appears to be shrinking at a similar pace. With inflation set to rise further over the coming months, the region will remain in a tailspin for some time to come," Capital believes, admitting that even though it has been warning of a painful adjustment for some time, "the scale and the speed of the slowdown has taken even us by surprise."

Telling it how it is

Just before Capital issued its downbeat assessment, former Swedish central bank boss Bengt Dennis was calling for a cautious investment strategy for anyone considering a Baltic angle to their portfolio. Speaking in Vilnius at a summit organized by East Capital, one of Central and Eastern Europe's leading investment companies, the veteran economist said: "I would agree with those saying that we don't know yet if the [Baltic] economy has bottomed out, as we have had so many false starts."

Dennis was keen to stress that since independence the Baltics had performed admirably in liberalising their economies, but that recently weak governments had made a series of "policy lapses" resulting in a loss of competitiveness. "We are very uncertain about the depth of the correction. The sharp slowdown in Estonia will be followed by a much sharper slowdown in Latvia... a sharp decline is setting in now," Dennis told an audience of seasoned investors in the region.

Regarded as the doyen of Baltic economy watchers by many, Dennis' words will cause severe discomfort to any investors who think the Baltics are still booming and sources of easy profits. He continued to describe the region's budgetary deficits as "alarmingly big," roughly doubling in the last 2 years. "Investors are uneasy and the currencies may come under renewed pressure, although they are quite quiet at the moment," Dennis continued. "Foreign traders are getting more cautious as deficits of this size are not sustainable in the long term."

Dennis' independent position as East Capital's main Baltic-watcher has clearly freed him up to say what no Baltic politician or central banker could ever admit to - and that includes the fact that adoption of the euro is now little more than a fantasy. "I think the euro is many, many years off and the imbalances make the Baltics unnattractive euro members. My own feeling is that the euro is no longer a political priority in any of the Baltic countries," he added, before concluding with a call for politicians to aim for simple sustainability rather than seeking to return to earlier levels of supercharged growth which helped create the current situation.

"The Baltic tigers will be back, but they need some rest," Dennis said.

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