The amount of debt in Latvia is not such as to cause problems at the national level, but our country can be negatively affected by the rest of the world’s problems, slowing down the speed of money circulation and for a while making borrowing even more expensive than the rising interest rates have been able to do so far. This will also affect the “little man”, because the speed of money movement in the national economy is also largely decisive in changes related to wages.
Government debts are shrinking for the time being
The arrival of Covid-19 and additional expenses for government budgets naturally also meant an increase in public debt, as the sums that had to be spent to prevent the economy from falling into a “free fall” were impressive. This process was also accompanied by a supportive policy of central banks, which increased the money supply and bought government debt securities so that countries could borrow at the lowest possible interest rates and with smaller payments to lenders. However, problems began when inflation, which had seemingly disappeared, returned with a vengeance and the monetary wheel had to be turned from a soft, borrowing-oriented policy.
True, there was a small gap of time in between – about a year, which was good for the state of the countries’ finances. In other words, higher and higher inflation also meant higher revenues in the budget, besides, at higher prices, the previous debt expressed in nominal monetary terms is easier to bear. As both the nominal tax and economic volume grew under inflationary conditions, favorable conditions arose for countries to reduce their debt to economic volume, or gross domestic product (GDP). Thus, for example, the total debt of the governments of the EU countries in 2020, after the provision of support measures for Covid-19, reached 90% of the volume of the economy of the union. For comparison, a year earlier they were 77.7% of GDP. However, as the economy recovered, prices increased and tax revenues increased, in 2021 the debt had shrunk to 88%, and last year it was already 84% of GDP, according to “Tradingeconomics.com” information.
The trend is also similar in the Eurozone, but the debt level of the countries of the currency zone is significantly higher – a drop from 97.2% to 91.5% of GDP, respectively. A higher amount of government liabilities in this case may seem strange, because one of the criteria for joining the European monetary union was the amount of public debt no higher than 60% of GDP. However, it should be taken into account that the financial planners of some southern countries of the eurozone, as well as countries such as France and Belgium, are not particularly concerned about the high debt statistics. In addition, among the southern countries there are also those whose debt volumes are growing rapidly, while for some countries slightly to the north, the growing amount of liabilities does not seem to be anything special. Probably because they expect the European Central Bank and other financial institutions to bail out if something bad happens, because they don’t want to allow the disease caused by default to spread.
As a result, while Portugal has seen a marked decline in public debt, shrinking from 135.2% of GDP in 2020 to 113.9% at the end of last year, progress in France has been much more subdued. The amount of this country’s debt has only decreased from 114.6% to 111.6% of GDP in the period of the two years mentioned, despite the fact that the already mentioned period of high inflation was favorable for collecting more money in the budget and settling its previous obligations with it . Although the amounts of debt are high, the overall situation is improving, at least in statistical numbers. Also for Latvia, which in 2022, with 40.8% (42% in 2020, and 43.7% in 2021) of government liabilities to GDP, is at the bottom of the table of debtors in the eurozone. For comparison, Germany, the famous financial model country, last year had a government debt of 66.3% of the economy.
A bouquet of dangerous factors
Although this overall picture indeed heralds progress, the current economic and financial background is not conducive to its continuation. The aggressive increase in interest rates means that countries will also be forced to allocate more and more funds to settle previous obligations. This may mean that you may have to borrow more and more and the debt burden will be more “bearable” as inflation also tends to fall. Falling inflation also means that the nominal amount of tax revenue in monetary terms could decrease.
Thus, a combination of two or even three unpleasant orientations can be formed. Namely, on the one hand, the need to borrow is increasing, moreover, it must be done at higher interest rates, while, on the other hand, the amount of cash income with which to settle these obligations is decreasing. In addition, if you look at a completely negative scenario, then under the influence of initially falling and later stagnating economy, if they do not want to default, countries will have to find more and more complicated ways to different lenders. Of course, the question is how strong the economy is. For example, Latvia experienced financial turmoil in 2008 not because it had a large government debt (it was less than 10% of GDP), but because the economy was built too much at the expense of private borrowing.
When it comes to the next year, European countries can be brought down by overly optimistic budgets. Traditionally, in order to meet as many expenditure positions as possible, budgets are “drawn” relatively optimistically, and problems start when something unexpected happens. For example, inflation and economic activity are falling more than expected, so less tax money comes into the budget, but then everything goes on a negative spiral. Also, the situation in Europe can be complicated by the political turmoil in the USA, which may face default in the near future. The problem is that within the framework of the approved state budget, tax revenues alone are not enough and the state needs to borrow, but such an agreement has not been reached in the US Congress since the beginning of the year, and the state does not have the opportunity to get the necessary funds. Probably, nowadays it is rare for a country to technically be able to fully settle its debt obligations, so the previous loans are refinanced with new ones, and the USA is one of the pioneers of such a financial policy. It is likely, however, that after a nerve-wracking standoff between Republicans and Democrats, some kind of agreement on the authorization of new borrowing will be reached at the last minute and the country will continue to pay its bills. However, every action has its own “first time”, and even in this case there is no 100% guarantee of success, which means that the sensitivity of the financial market to various shocks is increasing. As a result, lenders will also be more cautious towards the debts of European countries, especially countries whose financial situation “on paper” is not too bright.
Money from one to another
As the negations spread, the situation that existed about ten years ago, when capital from financially weaker countries went to stronger ones, may again develop. Latvia does not belong to either of them. Perhaps with a slight tendency towards being among the ‘financial strongmen’. However, due to its geographical location and small financial market, Latvia is unlikely to experience a noticeable influx of money, as it flees from those countries that are having a harder time. Then, rather, potential money depositors and investors could choose Finland, because it has greater recognition and also a larger financial market, and this could happen despite the fact that the debt of this country’s government per economic unit is higher than in Latvia. Last year it was 73% of GDP compared to 74.7% in 2020.
If we talk about Latvia, when the crisis comes, the economic life of our country will most likely not deteriorate due to the debts of the government or the private sector, because they are relatively small when compared to the size of our national economy. However, this does not mean that our lives will not be affected, because if the scenario of a new global debt crisis were to materialize, our country would also have to face trends related to slower cash flows, slowed investment and falling demand. Already, with a slight economic shake-up in Europe, we see that our production volumes are falling. With greater negatives, less foreign money will flow into Latvia and there will be less money to spend inside the country.
2023-05-14 02:15:23
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