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Latvian Economy Update

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Latvian Economy Update

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Another victim of greedy bankers, foolish decisions and a huge slice of bad luck, the financial future doesn't look bright for poor old Latvia.

TOM TAINTON discusses the dwindling economy.

In Latvia, economic turmoil isn't just shaking the nation's banking system, now the impact of the credit crunch has helped to overhaul the government. In typically unstable Baltic fashion, thousands protested in the cobbled streets of Riga, voicing their displeasure at the country's financial policy. The aftermath resulted in more than 100 arrests and nearly 50 injuries. But the damage was done. The Prime Minister Ivars Godmanis and his right-wing government resigned from office, tails tucked sheepishly between their legs.

In December 2008, Godmanis was forced to seek 7.5bn euros from the European Union, World Bank, and IMF to bail out the banking industry. As part of the deal he had to cut public spending and increase taxes - the sort of policies that won't get you on anybody's Christmas card list.

So what has happened to Latvia? Just two years ago, the nation's economy, thriving from its relatively new-found independence, was growing by 12%. Today the economy is in deep recession, and the only figure growing is that of unemployment - expected to rise by a staggering 40% in 2009. To make matters worse Latvia's gross domestic product (GDP) plummeted 10.5% in the last quarter of 2008, compared with the same period a year previously. Experts are predicting the outlook will only get gloomier, with GDP shrinking again this year.

It doesn't make easy reading for the Latvian government, who face a struggle rebuilding confidence with the country's 2.4 million people. But, as is the common theme in the financial crisis, the blame can be placed firmly on the heads of Latvia's banking superiors. One major reason for the decline was some shady deals made by locally-owned banks, institutions which make up nearly half of the Latvian financial system.

The bankers snaffled deposits from abroad and invested them in the booming property market. When the property market began to decline (surprise, surprise), foreign credit dried up and confidence in Latvian banks evaporated quicker than you can say ‘Northern Rock'. As customers panicked, rushing to scoop up their deposits, the second largest bank, Parex, collapsed and has since has been largely nationalised.

Another victim of greedy bankers, foolish decisions and a huge slice of bad luck, the financial future doesn't look bright for poor old Latvia.

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