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Let's eat potato peels
By Abdul Turay
Published in Postimees on 2 December 2008

At a meeting of foreigner investors recently held in Tallinn there was a consensus on one issue.
Estonians hadn’t yet woken up to just how serious the current economic crisis is.
People don’t seem to realise what is at stake. It is not just a question of a few bankruptcies, nor of shopping cheaply, nor buying a smaller car, nor having a few friends and relatives out of work.

Just to shake people out of their complacency let’s give a hypothetical situation.
Imagine if the Estonian economy was owned lock, stock and barrel by Russian banks, a world in which some dour, Putin yes-man, in Moscow decides how companies do business in Tallinn. A country where your home loan was already with a Russian bank and try as you may, you couldn’t switch it to an Estonian one.

If you think that the above situation is just fantasy this is from 23 October edition of the Economist: “…one or more parent banks will put a troubled subsidiary up for sale, perhaps to a Russian buyer. That prospect is unlikely. But it sets nerves jangling in places such as the Baltic States.”
It is “unlikely” but if a magazine as respected as the Economist is writing about it, it is not impossible.

This is a nightmare scenario and it should never be allowed to happen, ever.
However in order to prevent even the possibility of such an awful situation most international pundits agree the country is going to have to swallow some bitter medicine.

The big issue which has investor in Estonia abuzz is devaluation.
Some argue devaluation will come; it is just a matter of when. It is widely accepted that the currencies of all three Baltic countries are overvalued. This makes Estonia and its neighbours’ exports expensive and the country unattractive to tourists.

Those in favour of devaluation argue it will increase the money supply, make the country more competitive and stave off higher unemployment.

Pundits say without devaluation the recession will last into the foreseeable future. Clearly it is an impossible situation to have a currency which is too expensive. The Kroon is now 20 to 30 per cent more expensive than the currencies of Sweden, Norway the UK, all major trading partners.
Meanwhile The Estonian Central Bank keeps making loud noises that devaluation is not going to happen. Andres Sutt, vice president at Estonian central bank told Postimees on 14 November that devaluation would be pointless.

“Salary growth, inflation and loan growth have lowered very fast. So current account deficit has also diminished and Estonia’s dependence on foreign financing is lowered. Financial situation of banks operating here is also strong,” Sutt said.

However devaluation is looking more likely now than it did even a week ago. Dow Jones, the international news business outlet, reported on 24 November that the IMF may force Latvia to devalue its currency in order for it to qualify for the loans it needs. If Latvia devalues its currency, it makes it harder for Estonia to keep the peg to the euro.

Of course the arguments against devaluation are powerful ones. Estonia will have to restart the clock in joining the euro. And for Estonia to adopt a measure it was so against for so long damages the country’s financial standing and credibility with international investors and ratings agencies.

It could even cause a run up the currency.

The benefits of a cheaper Kroon to exports are also questionable as the prices of imported raw materials will go up.

But the real worry is what it means for the man on the street. Loans for many businesses and individuals including home loans are in euros. If the Kroon is devalued it will make it harder for businesses and individuals to pay off those loans.

Sutt and his colleagues may assure us devaluation won’t happen the trouble is the Estonian economy isn’t controlled by Sutt; it is controlled by Swedish banks.

There is very little the Estonian Central Bank and government can do to manipulate the economy.

In other countries when banks get into trouble the government have stepped in with tax payer’s money to bail them out. Here the government has to sit back and see what the Swedish central bank, the Riksbank, and the Swedish government does. So far Swedish banks-with the exception of Swedbank- have been reluctant to join their government’s schemes to guarantee their debt to the turn of 145 billion euro. If they don’t like their government meddling in their strategic affairs just how would they react to a foreign government’s meddling.

To spare Estonian borrowers from the misery of trying to pay expensive euro loans with cheap Kroons, the Estonian government could force the banks to change all loans to Kroons and then devalue the Kroon, in effect ripping off the banks. This was tried in Argentina in 2002 when the government de-coupled the Argentine currency from the dollar.

This is not a good idea. The banks might feel strongly enough to cut their losses and sell their subsidiaries to the highest bidder. The Russians have the money and the motivation to buy.
This brings us to the nightmare scenario we looked at the beginning of this piece.

On the other hand if business and individuals were to start defaulting on mass on loans, the banks again may have to reconsider their commitment to the region.

So the morale of the story is, be nice to the Swedes. If you have any Swedish relatives or acquaintances don’t forget to wish them well this Christmas.

We have been here before. Estonia was once a colony of Sweden. The Swedes as the Estonians readily acknowledge did a lot for Estonia. In history books it is always referred to as “the good old Swedish days”. But in the end Sweden was forced to cede Estonia to the Russian Empire. They didn’t want to do it, they didn’t like to do it, but they had lost a war and they had no choice.
There is simply no easy solution to these problems. It seems whether the Central Bank devalues or not people will suffer. But one thing is clear for anyone who cares about Estonia; we should all do whatever we can to make sure the bank don’t go bust and stop Putin’s gang from coming here, even if it means living on potato peels.


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