Euro, Aussie Dollar May Rise as Yen Falls on Greece Funding Deal

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Talking Points:

  • Euro to Look Past CPI Data, Focus on Greece Debt Negotiations
  • Greek Deal May Boost Aussie and NZ Dollar, Boost Japanese Yen
  • Access Real-Time FX Markets Analysis with DailyFX on Demand

The preliminary set of March Eurozone CPI figures headlines the economic calendar in European hours. The benchmark year-on-year inflation rate is expected to register at 0.3 percent, rising for a second consecutive month. The outcome seems unlikely to offer much by way of lasting Euro volatility however considering the results’ limited impact on the near-term ECB policy outlook.

Rather, the spotlight is likely to remain on Greece. Athens submitted a list of proposed reforms on Friday. The markets now await the verdict on whether the “institutions” representing Greece’s creditors – the EU, the ECB and the IMF – will approve it and unlock the next round of bailout funding. Investors fear that if external funding is not secured, a cash crunch and subsequent default may lead to the country’s exit from the Eurozone.

On balance, both sides of the negotiation are interested in a deal. Prime Minister Alexis Tsipras and company surely realize that a disorderly redenomination will probably compound the country’s economic woes and cost them their jobs. Meanwhile, EU and IMF officials no doubt prefer to avoid a “Grexit” scenario for fear of the precedent it may set. On balance, this means that some kind of accommodation is more likely than not.

An accord that prevents a default and keeps Greece in the currency bloc is likely to prove supportive for the single currency. Follow-through may be somewhat limited however as on-going ECB QE casts a dark cloud over the near-term outlook. It may likewise boost overall risk appetite, sending the sentiment-geared Australian and New Zealand Dollars upward while punishing the safe-haven Japanese Yen. Needless to say, failing to reach a deal stands to produce the opposite response.

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— Written by Ilya Spivak, Currency Strategist for DailyFX.com

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Euro to Look Past German CPI, Focus on Greece Funding Woes

DailyFX.com –

Talking Points:

  • Euro to Look Beyond German CPI, Focus on Greece Developments
  • Aussie, NZ Dollars Drop Amid Commodities-Driven Risk Aversion
  • Access Real-Time FX Markets Analysis with DailyFX on Demand

The preliminary set of March’s German CPI figures headlines the economic calendar in European hours. The benchmark year-on-year inflation rate is expected to register at 0.3 percent, rising for a second consecutive month. The outcome seems unlikely to offer much by way of lasting Euro volatility however considering the results’ limited impact on the near-term ECB policy outlook.

Rather, the single currency ought to be far more interested in Greece-related news flow. The government of Prime Minister Alexis Tsipras submitted a list of proposed reforms that it hopes will unlock the next round of bailout funding on Friday. The so-called “institutions” representing Greece’s creditors – the EU, the ECB and the IMF – began to evaluate the plan over the weekend, with a decision expected later today. Athens faces €5.8 billion in maturing debt this month in addition to the on-going expense of running the country.

Investors fear that if external funding is not secured, a cash crunch and subsequent default may lead to the country’s exit from the Eurozone. Such an outcome would be unprecedented, carrying with as-yet unknown implications for the financial markets at large. Avoiding that trajectory with an accord that keeps Greece within the currency bloc is likely to prove supportive for risk appetite, boosting high-yielding FX and weighing on the safe-haven Japanese Yen. Needless to say, failing to reach a deal stands to produce the opposite response.

Both sides of the negotiation are ultimately interested in a deal. Greek officials surely realize that sticking to their campaign promise of ending austerity at the cost of disorderly redenomination will probably compound the country’s economic woes and likely cost them their jobs. Meanwhile, EU and IMF officials no doubt prefer to avoid a “Grexit” scenario for fear of the precedent it may establish, particularly in larger countries with strong anti-austerity movements such as Spain. On balance, this means that some kind of accommodation is probably more likely than not.

The Australian and New Zealand Dollars underperformed in otherwise quiet overnight trade, falling as much as 0.4 percent each against their leading counterparts. The decline tracked a move lower on Australia’s benchmark S&P/ASX 200 stock index, pointing to risk aversion as the catalyst driving selling in the sentiment-linked currencies. The dour mood seems to have originated in softer oil and iron ore prices. Indeed, shares in the energy and materials sectors proved weakest on the session.

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Asia Session

European Session

Critical Levels

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

To receive Ilya’s analysis directly via email, please SIGN UP HERE

Contact and follow Ilya on Twitter: @IlyaSpivak

original source

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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Ireland’s Early IMF Pay-Off Gets Initial Euro-Area Approval

Euro-area finance ministers reached a provisional deal that would allow Ireland to make an early repayment of International Monetary Fund bailout loans.

The 18 national ministers, meeting in Milan today, said an early pay-off of most of the 22.5 billion euros ($ 29 billion) that the IMF lent Ireland as part of its 2010 rescue would help bolster the country’s recovery.

Ireland has “cleared the first hurdle” in its ambition to repay the loans early, Irish Finance Minister Michael Noonan told reporters after the meeting. “The object of the exercise is to make the Irish debt more sustainable.”

Having sought a 67.5 billion-euro bailout from the IMF and European Union countries in 2010 as borrowing costs surged and its budget deficit swelled, the country has since seen an acceleration of economic growth.

Today’s agreement would mean that euro-area countries waive the requirement stipulated in the terms of the bailout program that all creditors are repaid if one lender is paid back ahead of schedule. While Ireland seeks to pay back between 15 billion euros and 18 billion euros of the IMF portion of the rescue, it doesn’t want its other loans, received from the EU and from individual countries, to be affected.

“Over the next five years, if it’s approved and authorized, it will save us about 1.5 billion euros,” Irish Prime Minister Enda Kenny said in an interview with state-owned RTE Radio today.

Noonan said he hoped the 10 non euro-area finance ministers, who meet with their euro-area counterparts tomorrow, will also agree to the Irish plan.

Debt Sustainability

Early repayment will “strengthen Irish debt sustainability,” European Stability Mechanism chief Klaus Regling told reporters in Milan after the meeting. This would also “be to the benefit of other large creditors like” the ESM’s temporary predecessor, the European Financial Stability Facility, which helped fund the bailout.

The loans from the Washington-based IMF carried an effective 4.99 percent interest rate at the end of March, 1.93 percentage points more than the most expensive EU funds, according to the Irish finance ministry.

Noonan said in July that Ireland could save about 375 million euros a year refinancing 15 billion euros of its IMF loans at prevailing market rates. Ireland’s benchmark 10-year bond has fallen to 1.61 percent from a peak of over 14 percent in 2011.

Several countries including Germany must get formal approval from their national parliaments to allow an early repayment before they can take a final decision. It would then have to be signed off by euro-area finance ministry representatives.

To contact the reporter on this story: Ian Wishart in Milan at [email protected]

To contact the editors responsible for this story: Alan Crawford at [email protected] Zoe Schneeweiss, Patrick Henry

Euro zone ministers back Ireland's plan to repay IMF loan early

By James Mackenzie

MILAN (Reuters) – Euro zone finance ministers on Friday backed Ireland’s plan to repay part of its 2010 bailout package early, making it likely that Dublin can start paying some 18 billion euros (14.31 billion pounds) of loans from the International Monetary Fund by the end of the year.

Dublin has been pushing to pay back loans from the IMF early to lower its debt servicing costs after a successful return to the bond markets but needs approval from all creditors, including the European Union, before it can go ahead with the plan.

At a meeting in Milan on Friday, finance ministers from 18 countries sharing the euro gave Ireland a green light, making it all but certain that it will also be backed at Saturday’s full Ecofin meeting of ministers from the whole EU bloc even if it does not receive full formal clearance.

“Tomorrow this will go before Ecofin, there is not expected to be any issues and it will probably allow first movement before Christmas,” Prime Minister Enda Kenny told a news conference in Cork, after hearing the news from his finance minister Michael Noonan in Milan.

The loans are expected to be paid back over a period of time in three tranches of 6 billion euros, he said.

Ireland was forced to seek an international bailout from the European Union and IMF in 2010 to ward off bankruptcy.

It has since been able to resume borrowing on the market, after a successful exit from the programme in December 2013, where interest rates of under 2 percent are well below the 5 percent rate on the IMF loan.

Analysts from BNP Paribas estimated that Ireland could save around 400 million euros by repaying the IMF loans early, helping efforts to get the 2015 deficit within the EU’s limit of 3 percent of gross domestic product.

Earlier Noonan, who confirmed Ireland expected to post stronger-than-expected growth of 3 percent next year, told reporters that formal approval could be delayed by a number of technical issues but he did not see any substantial problems.

“There’s no pushback, there’s no opposition that I can identify so far but there are complications,” he told reporters at the margins of the meeting in Milan.

“There’s a Swedish election and they may not be in a position to make a political decision in Sweden even though there’s general support from what we’re hearing,” he said.

“So I think we’ll get a very good indication that we’ll get support but maybe not formally today and tomorrow.”

As part of the EU/IMF bailout package, Ireland also obtained bilateral loans from a number of countries, including a 600 million euro loan from Sweden, which holds elections on Sunday.

Under the terms of the deal, it must pay off all its creditors at the same time unless it receives approval to repay part of the package early.

(Additional reporting by Padraic Halpin in Dublin; Editing by Martin Santa)

Lagarde's Error Could Be Costly For The Euro Area

The IMF’s Article IV consultation with the Euro area makes grim reading.

It starts off upbeat:

The euro area recovery is taking hold. Real activity has expanded for four consecutive quarters. An incipient revival in domestic demand is adding to the impetus from net exports. Financial market sentiment has improved dramatically, particularly after the recent ECB measures. Sovereign and corporate yields are now at historic lows in many countries, and lower funding costs have helped banks raise more capital.

And it then goes on to praise the efforts national governments have made to clean up their balance sheets. It also commends policy-makers and regulators for the nascent banking union and the clean-up currently in progress. “Strong policy actions have boosted investor confidence and laid the foundations for recovery”, it cheerfully proclaims.

But that’s where the cheerfulness ends. The fact is that the Euro area is still in deep, deep trouble. The IMF identifies four key areas of weakness:

  • Activity and investment have yet to reach pre-crisis levels. The recovery of private investment has been weaker than in most previous recessions and financial crises. In the first quarter of 2014, growth was weaker than expected and unevenly distributed across countries.
  • Balance sheets are still impaired and debt levels elevated. Public debt levels remain high. Weakness in banks’ balance sheets inhibits the flow of credit and corporate and household debt overhangs impede demand.
  • Inflation is worryingly low, including in the core countries. By keeping real interest rates and real debt burdens elevated, very low inflation stifles demand and growth. It also makes difficult the adjustment in relative prices and real wages that must occur for sustainable growth to take hold.
  • Unemployment, especially among the youth, is unacceptably high. The average rate for the euro area is around 12 percent. Youth unemployment is even more elevated, averaging close to 25 percent. High unemployment erodes skills and human capital, inflicting permanent damage on the capacity of economies to grow.

And the IMF notes that much higher growth is needed to bring down unemployment and debt. Indeed it is. The most highly-indebted countries in the Euro area – unsurprisingly, also those with the highest levels of unemployment – are either flirting with recession, or deeply depressed. Falling gdp raises the sovereign debt/gdp ratio. If growth in these countries fails to recover, their debt/gdp levels will inevitably rise, not because they are necessarily borrowing more (though if tax receipts also fall due to recession they may be forced to) but due to simple arithmetic. Households, too, are unable to reduce their debts when incomes are stagnant or falling. The Euro area as a whole does need much higher growth, especially in the periphery.

It’s not at all clear where this growth is going to come from. Euro area policy-makers so far have relied on fiscal adjustment to restore competitiveness in order to generate export-led recovery. But there is a global slowdown at present, largely due to China’s economic difficulties. Given this, the fragile export-led recovery of countries like Portugal and Ireland looks very vulnerable.

Intra-Euro area exports don’t look too promising either. Germany’s economy is slowing, and other core countries such as Finland and the Netherlands are in recession. France’s economy is rapidly becoming a basket case. There is a general shortage of demand within the Euro Area which is manifesting itself as very low inflation. This is echoed outside the Euro Area too: inflation everywhere is on a downwards trend. There is, in fact, a global shortage of demand.

The IMF, wisely, advises that Euro area policy-makers should concentrate on supporting demand. It commends the ECB’s recent interest rate cuts and TLTRO lending programme. And it recommends that if demand remains poor, the ECB should do QE, specifically by buying a weighted basket of Euro area government bonds.

The IMF also warns the Euro area not to impose additional fiscal austerity in response to debt/gdp hikes arising from recession: “large negative growth surprises should not trigger additional consolidation efforts”. IMF researchers have previously shown that debt/gdp actually tends to rise during fiscal consolidation, so reinforcing consolidation when debt/gdp rises can cause a damaging spiral of austerity, missed debt reduction targets and more austerity.

The IMF’s dovish stance has not gone down well in Germany. The German finance minister Wolfgang Schäuble disagreed with the IMF: far from easier monetary policy being needed, he argued that there was too much liquidity in financial markets and interest rates were too low. His worry was rising house prices in Berlin and other prime real estate areas. Low inflation in Germany bothered him not a jot, and nor did high unemployment and depression in the periphery. Rather, he emphasised the importance of fiscal consolidation in the periphery. In his view periphery countries can, and should, reduce their debt and deficits through their own efforts without help either from the centre or from the ECB. Growth will return when they make the necessary structural reforms.

It didn’t go down too well at the ECB, either. Draghi reminded everyone that QE can involve purchases of private sector securities – presumably with SME loan securitizations in mind, since that is the scheme currently being cooked up by ECB policy wonks. But as ever, he prefers to “wait and see”. Maybe the measures taken in June will be sufficient to restore growth in the Euro area despite all the headwinds. Maybe there is a confidence fairy. Maybe.

Christine Lagarde

Christine Lagarde (Photo credit: Adam Tinworth)

The widening cracks in the Troika are all too evident. But there is a much bigger problem. Last year, the IMF severely criticized the UK government’s fiscal austerity programme, which it said hampered growth. But the UK is now growing more strongly than any other Western country. On British television, IMF chief Christine Lagarde apologized. “We got it wrong”, she said.

Her apology was a major error. As Simon Wren-Lewis explains, the UK’s fiscal austerity has indeed hampered growth in the last four years, delaying the UK’s recovery from the financial crisis. But more importantly, Lagarde’s apology destroyed the IMF’s credibility regarding the politically-difficult Euro area Article IV consultation. It gave carte blanche to Euro area officials and politicians to say “you were completely wrong about the UK. Why should we take your advice?”

The IMF was not wrong about the UK – it was just late to the party. And it is not wrong about the Euro area, either. The Euro area desperately needs a looser monetary policy and relaxation of fiscal austerity. Structural reforms, while necessary, will not be sufficient to restore growth. The Euro area needs more investment – as the IMF recommends – and demand support, particularly in core countries where inflation is falling.

Above all, the Euro area needs hope. Relentless austerity and debt deflation depresses not just economies, but people. And it is people that drive economies. Somehow, the people of the Euro area have to be shown that politicians and officials really want to see growth restored. At the moment, it is not clear that Euro area politicians and officials even recognise that they have a problem. Wolfgang Schäuble’s comment that he sees no risk of deflation in the Euro area – even though inflation is currently at 0.5% – is telling. While politicians and officials remain so divorced from reality, it is hard to see much hope for the Euro area. A convincing IMF Article IV consultation could have restored some hope. The IMF’s loss of credibility is a disaster.

Although the IMF’s Article IV findings were grim, the recommendations, if implemented, would help to generate recovery. But they seem likely to be ignored. Lagarde’s error could prove very costly for the people of the Euro area.

Pound Weakens Versus Euro Amid BOE Jobless Threshold Speculation

The pound fell from a one-week high against the euro before a jobs report this week amid speculation the Bank of England will reduce its threshold for reviewing when to start increasing interest rates.

The U.K. currency swung between gains and losses versus the dollar. The unemployment rate declined to 7.3 percent in the three months through November, according to a Bloomberg survey before the data is released on Wednesday. Policy makers won’t consider raising borrowing costs at least until unemployment drops to 7 percent, Bank of England Governor Mark Carney said in August. U.K. government bonds were little changed.

“There’s little doubt in my mind that the 7 percent rate will be moved,” said Neil Mellor, a currency strategist at Bank of New York Mellon in London. “There’s definitely scope for doubts about rates and once that is thrown into the market you are going to get a market very long of sterling and it’s going to come right back again.” A long position is a bet the currency will appreciate.

The pound fell 0.1 percent to 82.49 pence per euro as of 2:31 p.m. London time after appreciating to 82.33 pence, the strongest since Jan. 9. The U.K. currency was at $ 1.6435 after rising and falling as much as 0.2 percent.

Sterling strengthened 7.9 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 2.9 percent, while the dollar dropped 0.6 percent.

Forward Guidance

More than 60 percent of respondents to a Bloomberg survey this month said Carney will refine the flagship policy when the central bank publishes its quarterly Inflation Report on Feb. 12. Almost a third of economists said the jobless rate will fall to 7 percent in the first half of the year, a level that will require Carney to consider raising borrowing costs.

The pound earlier climbed to a one-week high against the euro after property-website operator Rightmove Plc said asking prices for homes in England and Wales rose 1 percent this month, after dropping 1.9 percent in December.

“Housing is relatively strong and is something on the inflationary side,” said Georgette Boele, global head of foreign-exchange and commodity strategy at ABN Amro Bank NV in Amsterdam. “It could be a reason for the Bank of England to be a bit more hawkish. We have a more optimistic outlook for the U.K. economy, above consensus compared to the euro zone.”

ABN Amro forecasts the pound will strengthen to 79 pence per euro by year-end, Boele said. The median estimate of analysts surveyed by Bloomberg is for it to reach 81 pence.

IMF Forecasts

The IMF will upgrade its 2014 forecast for U.K. growth to 2.4 percent from 1.9 percent, Sky reported without saying where it got the information. Britain’s outlook has improved and gross domestic product will increase 2.7 percent this year, up from an estimated 1.9 percent in 2013, the E&Y Item Club said in a separate report published today.

The 10-year gilt yield was at 2.82 percent after dropping to 2.80 percent on Jan. 17, the lowest since Dec. 2. The price of the 2.25 percent bond due in September 2023 was 95.22.

Gilts lost 1.6 percent in the 12 months through Jan. 17, according to Bloomberg World Bond Indexes. Treasuries fell 2 percent, while German securities returned 0.5 percent.

To contact the reporter on this story: Lucy Meakin in London at [email protected]

To contact the editor responsible for this story: Paul Dobson at [email protected]

Euro zone inflation slows in December, IMF flags deflation risk

By Martin Santa

BRUSSELS (Reuters) – Euro zone inflation slowed in December, the European Union’s statistics office confirmed on Thursday, in what the European Central Bank attributed last week to a one-off change in the method of calculating price growth in Germany.

Price pressures are weak, enough, however, to prompt concern at the International Monetary Fund about deflation.

Consumer prices in 17 countries sharing the euro last year rose 0.3 percent on the month, putting the annual inflation rate at 0.8 percent, down from 0.9 percent in November, but a tad above 0.7 percent in October.

The ECB, which wants to keep inflation below-but-close-to 2 percent over the medium term, expects a prolonged period of low inflation but sees no immediate risk of deflation – or actual falling prices.

“We were all aware that the decline in the inflation rate in December …(It) was expected, and it was caused by a technical adjustment in the statistics of the services inflation in Germany,” ECB President Mario Draghi said last week.

“(This) basically produced a much flatter seasonal adjustment and it meant that the December data came out lower…. But fortunately this was a one-off event, so that the January data will not be distorted by this,” he said.

The International Monetary Fund, however, said on Wednesday it expected global growth to pick up this year but flagged deflation as a rising risk.

“If inflation is the genie, then deflation is the ogre that must be fought decisively,” IMF chief Christine Lagarde told the National Press Club in Washington.

Eurogroup President Jeroen Dijsselbloem said earlier on Thursday consumer prices were unlikely to slow further and the current low level is not a major threat to economic recovery.

BUMPING ALONG THE BOTTOM

The October inflation level was a nearly four-year low and pushed the ECB towards a cut in its key lending key rate to a record low of 0.25 percent in November.

The monthly consumer price increase in December was led by a 0.6 percent rise both in prices of services and the highly volatile energy costs.

Prices of food, alcohol and tobacco were up by 0.5 percent while costs of non-energy industrial goods fell 0.3 percent when compared with November.

Consumer prices in Germany, Europe’s largest economy, rose 0.5 percent on the month in December, but the annual inflation dropped to 1.2 percent from 1.6 percent in November.

The annual inflation rate in Spain stood 0.3 percent for the second month in a row in December after being flat in October.

Annual inflation in Portugal rose for the third consecutive month, but was still standing at just 0.2 percent in December.

The fall in inflation rates is related to an overall economic adjustment and restoring of competitiveness of Europe’s southern periphery countries, where growth collapsed during the crisis and triggered a massive austerity push.

“While eurozone growth is expected to improve modestly during 2014, activity will likely generally remain too limited to generate any significant inflationary pressures,” said Howard Archer, chief European economist at IHS.

“Furthermore, a relatively strong euro is also limiting inflation,” he added.

(Reporting by Martin Santa)

Latvia reluctantly joins euro after shock therapy, but controversy rages on

Baltic nation to join the euro on New Year’s Day against the wishes of its own people, five years after its economy crashed in flames

The tiny Baltic nation of Latvia is to join the euro on New Year’s Day against the wishes of its own people, becoming the eighteenth and poorest member of monetary union five years after its economy crashed in flames.

The country has endured a 1930s-style depression and a drastic experiment in EU shock therapy with stoicism, abiding strictly to the terms of an EU-IMF bail-out.

It has exported its way back to balance and defied critics by defending its euro-peg through thick and thin, yet the feat comes at a high social cost.

Euro accession has been greeted glumly by most of Latvia’s 2m people, worn down by lay-offs and 28pc pay cuts for teachers, nurses, and police. A mass exodus of youth has served as an escape valve, leaving an older society behind. Latvia’s population has shrunk by 7pc since 2007.

An SKDS poll in November found that just 20pc favour giving up the national currency, the Lats, brief symbol of sovereignty in the interwar years between interludes of Tsarist and Leninist occupation. The Lats was restored with great emotion in 1992 after Latvia broke free of Soviet control.

Few seem mollified by the familiar face of Milda — the braided ‘Latvian Maiden’ — on the new euro coins. Some 58pc are against joining the new currency, yet the government has chosen to press ahead regardless without a referendum.

Latvians are acquiescing quietly, if only because the euro helps to counter the strategic threat of Vladimir Putin’s Russia to the East. “Russia’s long shadow is the most important factor in Latvian politics,” said Professor Ivars ?jabs from Riga University.

Latvia’s leaders have sought to lock the country as deeply as possible into the western economic and security system, aiming to raise the bar high enough to discourage meddling from Moscow. Finance minister Andris Vilks says the euro is an insurance policy. “We can see what is happening in Ukraine. Russia isn’t going to change. We know our neighbour,” he told the Financial Times .

Latvia’s ordeal of boom, bust, and recovery has set off a heated debate among economists worldwide over the pros and cons of rigid austerity and fixed-exchange rates, a dispute unlikely to be settled by euro-entry.

Olivier Blanchard, the IMF’s chief economist, warned that Latvia’s saga should be treated with “great caution”, saying the country is sui generis and may not be a useful model for others. This has not stopped both sides digging in their heels.

European officials praise Latvia as the poster-child of “tough love” policies and a vindication of EMU “internal devaluation” strategy, proof that hard grind pays off better than a devaluation quick fix.

The economy grew by 5.5pc in 2011, and 5.6pc in 2012, and should grow by 4pc this year. Productivity levels have soared. The unemployment rate has dropped from a peak of 20.5pc to 11.9pc. Olli Rehn, the EU economics commissioner, says Latvia is a role model for EMU crisis states. “Tough decisions have allowed Latvia to emerge much stronger economically than before the crisis,” he said.

Critics are exasperated by such claims, countering that it was the euro-peg that incubated Latvia’s disaster in the first place, leading to interest rates that were far too low for a post-Soviet catch-up economy. The policy stoked an extreme credit bubble.

The country then lurched violently the other way, with GDP contraction of 25pc over eight quarters, and a 42pc fall in internal demand. Latvia’s leaders clung to an overvalued exchange rate against the advice of the IMF — largely for political reasons, but also to shield middle-class homeowners with euro and Swiss franc mortgages.

Real GDP remains 8pc below its peak even now. The unemployment rate has been flattered by emigration. Prof Mihails Hazans from Latvia University said the majority of those leaving are under age 35, often the best-educated. Just 20pc plan to return within five years. Latvian society has been gutted.

“The adulation of Latvia tells us more about what the European policy elite wants to believe than it does about the realities of Latvian experience,” said Nobel economist Paul Krugman, the most vocal of the critics. “What lesson does Latvia hold for other countries, and the euro in general? The answer, in brief, is none.”

A key question is not whether Latvia is growing again but whether it is close to fulfilling its potential as a post-Marxist Tiger economy with full access to the EU markets that should be enjoying Asian style growth rates. Poland has done much better over the last decade as a whole, deploying its currency to check the boom and then to cushion the shock after foreign credit dried up in 2008.

The IMF said Latvia’s recovery has been a success, but also questioned whether this can be replicated. The country has an open economy with exports equal to 60pc of GDP, double levels in southern Europe. It places 24th on the World Bank’s Ease of Doing Business index, comparable to Germany and above Holland, Austria, and France.

Latvia has a public debt near 40pc of GDP, far below levels in Greece, Cyprus, Ireland (Other OTC: IRLD – news) , Portugal, Italy, or Spain. This reduces the risk of a spiralling debt ratio caused by deflation policies, the so-called ‘denominator effect’.

Swedish and other Nordic (SES: MR7.SI – news) banks control 60pc of the Latvian banking system, reducing the need for the state to shore up the financial system — as in Ireland, or Spain.

The irony is that Latvia is now inventing a new business model for itself as a tax-haven and off-shore banking centre for Russian funds, luring deposits away from crippled Cyprus. It is a new Cyprus in the making, says Marco Giuli from the College of Europe. But that is a drama for another day, and another cycle.

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