Canada

Yesterday we showed the correlation between a currency and its stock exchange. More of the same today. This time we have Canada.
Question is: who leads…
I guess it’s the currency

That’s all folks. Although the monsoon is pouring for the last couple of days, we know the pub is open. Just lean back and enjoy. It’s summer after all, now isn’t it…

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Don't cry for me, Latvia

We still look to the problems in Latvia. A lot of people assume that the crisis will be small and manageable. Nothing special.
We fear that – as what happened in 1998 – there is a lot of potential that this crsis can spread very quickly over Eastern Europe and that the EU will react too slow to prevent this. The financial version of the swine flu.
Here is an excerpt from an article of Anatole Kaletsky from last week. Anatole is writing for The Times.

Europe is now in the middle of a perfect storm - a confluence of three separate, but interconnected economic crises which threaten far greater devastation than Britain or America have suffered from the credit crunch: the collapse of German industry and employment, the impending bankruptcy of Central European homeowners and businesses; and the threat of government debt defaults from loss of monetary control by the Irish Republic, Greece and Portugal, for instance on the eurozone periphery.
Latvia, partly because it has followed an Argentine-style policy of “fixing” its exchange rate and encouraging its citizens to borrow in euros and Swiss francs, is now in the front line of the battle between governments and financial markets - and a humiliating devaluation looks increasingly likely. Last weekend a former Swedish finance ministry official brought in by the Government as an adviser admitted that devaluation was no longer a matter of “if” but of “when and how”. If Latvia does devalue, then the two other Baltic states will almost certainly be forced to follow and the panic will probably move to Romania and Hungary. Beyond that, the contagion is likely to spread to the weakest members of the eurozone - Ireland, Greece, Portugal and probably Austria.
If the crisis expands, other EU governments - and especially Germany’s - will face an existential question. Do they commit hundreds of billions of euros to guarantee the debts of fellow EU countries? Or do they allow government defaults and devaluations that may ultimately break up the single currency and further cripple German industry, as well as the country’s domestic banks?

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The rigibor

The Lat is the currency of Latvia, the tiny Baltic country in huge difficulties. The authorities try to defend the peg of the local currency. Against the rest of the speculating universe.
We heard of reports stating that the government will come up with another plan in order to secure the lat.
In the mean time are local interest rates – better known as the Rigibor – soaring. Overnight rates are around 20% now.

Defending a currency is costly, because you do this through intervention and it’s a very tricky thing to do once the hunting season is open.

Estonia and Bulgaria are other countries having their local currency pegged to the euro. But they are out the eurozone. Now, is it an advantage to be in the eurozone?
Ask the Irish: they were downgraded today because assets of banks are fast deteriorating. That’s the second time in less than 3 months.
Will the Irish government default on its debt? Prices of insurance against a default – the so called Credit Default Swaps (or CDS) – went up and up and up this morning. The will need the Irish luck...

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