I thought I'd take a short break from blogging to focus on my core work.
However, it’s a bit hard to focus when the leaders of People’s Party (TP) and First Party/Latvian Way (LPP/LC) announce that the agreement with international donors is not in Latvia’s interests… and, therefore , should be repudiated. With each day that Prime Minister Dombrovskis spends at work public debt increases by 5 million lats, and the number of unemployed increased by 208 – said Mr. Škele. Both Mr. Škele and Mr. Šlesers want to refinance the loan in international financial markets and focus on earning, and not cutting the budget.
Ok, it’s not like I am totally surprised. In September last year I already argued that it is highly unlikely that People’s Party would just sit through the whole ‘internal devaluation’ exercise and that pushing for devaluation was the only course of action that really made sense for them. By implication, any other course of action would not make much sense. And yet, the sheer degree of absurdity into which the People’s Party (and LPP/LC) has opted is striking.
I am not even going to argue about the pros and cons of this stabilization program. At this stage, lets just establish who did what. Who signed the agreement in the first place? Was it not the government of Mr Godmanis? Is he still a member of LPP/LC? Was it not our bungling minister of finance at that time, Mr Slakteris, who went to the IMF in the very first place? A member of People’s Party in good standing, wasn’t he? Then, if my memory serves me right, in November 2008, prior to signing the agreement, IMF insisted on a parliamentarian vote about the program. ALL of the large parties voted FOR this agreement, including TP, LPP/LC, and even opposition Harmony Center (SC). Did they not understand what they voted for? Now, Mr Škele and Mr Šlesers seem to be unhappy about the rapidly escalating public debt, high unemployment, and long recession. Yet here is an excerpt from the IMF’s Request for Stand-By Arrangment, dated January 2009 (p. 9):
The authorities’ unequivocal commitment to the exchange rate peg has determined their choice of program strategy. Though this commitment augurs well for program ownership, the authorities also recognize that their choice brings difficult consequences, including the need for fiscal tightening and the possibility that recession could be protracted, perhaps more so than if an alternative strategy had been adopted. [emphasis mine].
That same document projected rapidly escalating public debt – after all, this is precisely what happens when the government borrows 6.5 billion euros. Further, opting for internal devaluation would clearly produce substantial unemployment and a recession that would be protracted. Are these gentlemen now trying to say they didn’t know any of this back in November 2008??!
The bottom line is this. Mr Šlesers and Mr Škele were among the ones who signed the agreement in the first place. At the time of signing, it was crystal clear that the program would entail substantial fiscal consolidation, high unemployment, escalation of public debt and, very likely, a rather long recession. All of the above would be mitigated if a different strategy (external devaluation) was chosen, but it would also imply a very different distribution of losses. And that, in my opinion, was the main reason why this option was ruled out. Still, it is the program jointly owned by LPP/LC and People’s party (New Era and ZZS too, of course). Ironically, the government of Dombrovskis is merely sticking to the program launched by Mr. Šlesers and Mr. Škele, among other people. And now these gentlemen are trying to say it’s not their program and that they want out of it.
And by the way, there really is no way out (apart from doing the D thing). Refinance the IMF/EU loan in the markets?! And what interest rate would you need to promise in order to convince the investors to sign up for the (AS)^2 plan to earn money and not cut the budget?? Actually, I nearly want this to happen because I am so curious as to what this debt auction would look like!
PS On a somewhat unrelated note. A year and a half after the start of this program, it’s a bit funny reading how this commitment augurs well for program ownership, isn’t it? I mean, given that two ‘owners’ just announced they’re no owners at all… and who knows, maybe half a year later we’d have a very hard time finding anyone who would admit ‘ownership’ of this program. Next time, maybe the IMF shouldn’t be so naïve about what politicians say.
It was kindly pointed to me that Mr. Šķele, technically, did not sign the agreement with IMF/EU because he was not in politics at that time. It is true, Mr. Šķele only returned to People’s Party in the fall of 2009. I apologize for this factual error, largely borne out of, perhaps somewhat subconscious instinct to affiliate Mr. Šķele with People’s Party, regardless of his official status.
Some observers opined Mr. Šķele has had substantial influence on People’s Party even not being its member, but these are, of course, just opinions and not facts.
And yet, I also remember a very recent instance in which Mr. Mr. Šķele publicly vowed not to derail the IMF program. Calling for its termination just a few months later is clearly at odds this earlier vow.