The sad story of the Baltic states: market based financial repression does not lead to a current account surplus (3 graphs)

Update: after writing this post I started to read this Claudio Borio e.a. paper and encountered this quote:

“In September 2007,foreign currency credit stood at a quarter or a third of total bank credit in the
Czech Republic and Poland, more than half in Hungary and about 90% in the Baltic states.”

Leszek Balcerowicz still does it: using the Baltics and Bulgaria (the Bell’s) as an example of succesful austerity and internal devaluation without first checking the facts. Despite all austerity they still won’t be able to pay back their external debts to the Swedish banks. At this moment in time they were supposed to have current account surpluses of about 5 to 10% of GDP – but what they have are deficits of up to 5% of GDP (exception: Estonia, which raised taxes instead of slashing expenditure). And they also do not witness a ‘V-shaped’ recovery – post-slump growth is not any higher than in Poland, in some of the Bell’s even lower. Mind however how neo-liberal deregulation of capital markets led to rather ridiculous current account deficits in the Baltics while less neo-liberal policies in Poland led to a much more benign situation.

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A bit of history: back in the nineties, the Asian countries which experienced similar problems did witness V-shaped recoveries – but these countries devalued their currencies with 20 to 40% (real exchange rate,i.e. corrected for domestic inflation). And Poland, which temporarily devaluated, indeed did much better than the Baltics. The same holds when we compare Sweden, which temporarily devaluated, and Denmark with its highly neo-liberal institutions but an overvalued and inflexible exchange rate. Temporal devaluation meant that Poland and Sweden did not have to resort to the outright ridiculous policy of raising interest rates to very high levels in the middle of the most severe financial crisis ever!