Latvia Waited Out the Storm in Joining the Euro, Says Investment Firm
Latvia's belated adoption of the euro may in some sense be more beneficial than Estonia's fast-track changeover in 2011, as the southern neighbor will join with the worst of the financial crisis and bailout packages behind it, a financial expert says.
"Whereas Estonia participated in the Greek aid program, and today there is a real risk that the money loaned has to be written off, then Latvia, thanks to lessons learned, may get off with smaller obligations in the future," Peter Priisalm, a partner with the investment firm Avaron, told uudised.err.ee.
The Greek debt crisis, as well as the Spanish and Cypriot banking crises, all deteriorated after Estonia joined the euro in 2011.
While joining the euro is a big deal and a potentially taxing burden for small countries like Estonia and Latvia, their accession is of little importance to the Eurozone as a whole, Priisalm said.
"I can't imagine a self-satisfied Angela Merkel and Francois Hollande discussing even for 10 minutes Latvia's accession to the Eurozone, ensuring one another that the Latvian example demonstrates that the euro area is on the right path."
And perhaps counterintuitively, Priisalm said Estonia and Latvia were successful in filling the Maastricht criteria precisely because of the economic crisis.
"If the acclimatization were over and new economic growth were to begin, it would be practically impossible for Latvia to fulfill the criteria necessary for joining the euro. Estonia, too, was only able to satisfy the criteria during the economic crisis," Priisalm said.
The Eurozone has been in a crisis, but it is still the second most important currency after the US dollar, Priisalm said, and adopting the euro will reduce risk in Latvia in the eyes of investors.
Indeed, Latvia saw an early return already today, as the rating company Fitch upgraded the country from BBB to BBB+, citing the euro changeover as the reason. The euro is also important for foreign banks operating in the country, as it will lower the risk of loans, while domestic banks will gain access to the European Central Bank's programs, Priisalm said.
Furthermore, the government will free itself from fears of devaluation.
"Although there has not been talk of the risk of devaluation for some years in the Latvian context, the continued use of the lats would retain the risk of renewed speculations in the emergence of the next crisis. This risk will disappear with the adoption of the euro and Latvia will become more attractive for foreign investors," Priisalm said.