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Latvia repeats no devaluation amid renewed debate

ForexJan 15, 2010 09:45AM ET
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By Patrick Lannin

RIGA, Jan 15 (Reuters) - Latvia's finance minister repeated on Friday that the government had no plans to devalue and saw no benefit in such a move after renewed debate about whether the small crisis-hit state has taken the right economic path.

The tiny country has become a cause celebre among world economists after keeping the peg of its lat currency to the euro unchanged, despite being in the grip of the EU's worst recession and having had to take a 7.5 billion euro rescue from the International Monetary Fund, European Union and other lenders.

Several economists, including Nobel laureate Paul Krugman, have criticised Latvia for sticking to the peg and predicted its end, comparing the Baltic state with Argentina. Others have said it was right given that many Latvians have debts in euros.

"Finance Minister Einars Repse calls for an end to any discussion about the stability of the lat because a devaluation of the lat as solution for economic growth is not being and will not be considered," the Finance Ministry said in a statement.

The statement was issued after a speech this week in Riga by Mark Weisbrot, co-director of the Washington-based Centre for Economic and Policy Research.

He told a conference that an overvalued exchange rate was hurting the economy and preventing the government from taking measures to ease the recession.

Weisbrot, who also wrote a column in Britain's Guardian newspaper, criticised the IMF and EU for going along with the fixed exchange rate and accused them of double standards.

Repse said world economists were split on the question and repeated that the government and central bank viewed an unchanged exchange rate as a solid base for the economy.

Instead of an external devaluation, Latvia is undergoing what economists call an internal devaluation of forcing down wages and prices to regain competitiveness.

Some domestic commentators have also called for a devaluation, though the idea has not won open political backing in the ruling five-party coalition, despite an occasional questioning of the policy.

An opinion poll in August last year also showed that Latvians were against a change to the exchange rate, but that more than 60 percent anyway believed a devaluation was likely.

The lat has recently hovered close to the weak end of its band against the euro, but on Friday it was quoted being away from the central bank's intervention level, with the euro at 0.7080/90 lats. The central bank intervenes at 0.7098 lats.

The Latvian market also has plentiful liquidity and money market rates have been falling. The overnight rate was quoted at 0.50/1.0 percent, well below levels of close to 20 percent seen during the mid-year devaluation and funding fear crisis. (Reporting by Patrick Lannin; Editing by Toby Chopra)

Latvia repeats no devaluation amid renewed debate

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