Three of a kind in the Baltics

By bne IntelliNews February 7, 2011

Mike Collier in Riga -

Being pursued through the winding streets of an old city by three drooling finance ministers probably happens quite a lot in the dreams of hedge fund managers, but is rarer in real life. Nevertheless, that's what happened to your correspondent on January 11. Luckily, the three hot-footed ministers were looking for a likely lunch venue after their annual meeting rather than revenge for past misquotes, and the pursuit was ended when they headed into a nice little restaurant not far from the fly-ridden dive where bne sat down to a bowl of pelmeni.

Could anyone imagine George Osborne, Christine Lagarde and Wolfgang Schaeuble strolling along Piccadilly together in search of sandwiches with not a bodyguard or spin doctor in sight? It provided a nice reminder that things happen in the Baltics that don't happen elsewhere - such as turning the double-digit economic contractions of 2009 into a strange sort of success story by 2011.

The three budgeteers - Latvia's Andris Vilks, Estonia's Jurgen Ligi and Lithuania's Ingrida Simonyte - were in Riga to compare and coordinate economic policy. But while an annual meeting can have little more than symbolic value, behind the scenes they really are developing close working relationships.

All three ministers seem cut from the same cloth, with a decidedly Scandinavian style that means they would probably look even more at home strolling along Stockholm's Drottninggatan in search of a smorgasbord. Ligi and Vilks are both very tall, lean and given to outdoor pursuits such as cycling and orienteering, while Simonyte sports the sort of elegant-yet-practical spectacles that are the default choice of the well-organized Nordic businesswoman. Temperamentally they are calm, articulate and fluent in several languages: in short, just the sort of people you want in charge of the national purse-strings.

The arrival of Vilks seems to have tuned the trio to the same wavelength. His predecessor Einars Repse had many good qualities, but struggled to keep both his emotions and his wardrobe in check. Now that he has bowed out to run a one-man research project into artificial intelligence from a shed in a small town in Latvia, a colourful but unpredictable element has been removed from the Baltic triumverate. Incidentally, Repse's parting gift from Prime Minister Valdis Dombrovskis was a .44 Magnum, so here's hoping his reputation as a loose cannon is behind him.

Vilks, in contrast, is the former chief economist of Sweden's SEB bank in Latvia, which to political loonies (including some of his coalition partners) makes him a Stockholm stooge, but which to most people means he appears to actually know what he's talking about (as evidenced in his interview with bne three years ago).

Collective rebound

The main message the triumverate wanted to convey was that, "economic recovery in all three Baltic states is faster than expected."

Most observers tend to agree. In January, the European Bank for Reconstruction and Development (EBRD) predicted growth for 2011 of 3.6% for Estonia, 2.7% for Latvia and 2.5% for Lithuania in comparison with, respectively, 2.4%, -0.1% and 0.7% in 2010. In her January outlook, Danske Bank's usually-prescient Violeta Klyviene was slightly more bullish, pencilling in growth figures of 3.9%, 2.9% and 3.6% for this year.

The ministers' joint declaration wasn't handed out until the ministers were already off in search of antipasti, and hidden in the text were a few tasty morsels, including that they "agreed that the introduction of levies on financial institutions ensures a fair burden-sharing and sets incentives to contain the systemic risk."

Further evidence of efforts to stop money sloshing around from one state to another came with Vilks' statement that the three have "more or less the same vision of the future on tax policy" and that tax rates will ultimately "become equal."

They also championed "more active use of financial engineering instruments such as credits, loans and venture capital," which will be welcome news to potential investors, and hinted at "further cooperation" launching state-owned companies onto the markets and introducing real estate reforms.

Such coordination will be challenging, though, as in some ways the Baltic states' economies are now based on three very different responses to the global economic crisis. All embarked on early austerity programmes (stimulus was out of the question as they had no money left), but Estonia's efforts were geared towards euro adoption, Latvia's towards satisfying the terms of its €7.5bn bailout from the International Monetary Fund and EU, and Lithuania's towards maintaining the confidence of the markets as it raised funds by repeatedly issuing paper. "Foreign exchange risks are much diminished as Estonia adopted the euro in January 2011, and Latvia continues to perform well under the EU/IMF programme," the EBRD says. "Lithuania has increasingly met financing needs in external capital markets, and will face a continued need to consolidate its public finances."

Consequently, the three now face different endgames, with Estonia reliant on Eurozone stability, Latvia focused on seeing its loan through to a successful conclusion and Lithuania generating enough growth to pay off its bondholders at maturity. "But there is no room for complacency," Simonyte stressed. "The truth is quite simple: either adjust your expenditure to your revenues or vice versa."

It is this shared credo that means ultimately the differences between the Baltics remain minor compared to their differences to the debt-ridden countries of southern Europe, a fact Jurgen Ligi reinforced by suggesting that the accession of Latvia and Lithuania to the Eurozone in 2014-15 would "increase the camp of conservatives" in the monetary union.

With the ministers so clearly of one mind on monetary matters, it would be interesting to know if they went for the expensive a la carte selection at lunch or opted for the more economical set meal for three.

Three of a kind in the Baltics

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