Lithuania’s GDP Plunge Renews Finance Worries
Lithuania’s economy shrank 22% in the second quarter, casting fresh concerns over the country’s finances and its currency peg to the euro.
The manufacturing and service sectors posted large declines, and public investment was hit by spending cuts as tax revenue fell, said Statistics Lithuania, the government statistics office.
The data renewed worries about whether Lithuania will be able to avoid following Baltic neighbor Latvia in requesting an emergency loan from the International Monetary Fund. The economy of Estonia, a third Baltic nation, has performed slightly less badly than the other two, though is still estimated to have fallen at a double-digit pace. Estonia and Latvia have yet to release second-quarter figures for gross domestic product.
The Baltics have been ravaged by Europe’s recession, higher interest rates and a property-market downturn that has hit a population that borrowed heavily in recent years.
The figures come a day after the IMF agreed with Latvia on lending terms for a €200 million ($283 million) payment, part of a €7.5 billion rescue package.
To win IMF support, Latvia had to cut $1 billion from both its 2009 and 2010 budgets, an amount that lowers next year’s spending by 11%. Latvia may also have to raise taxes if its budget deficit widens further.
Lithuania plans similar measures. More budget cuts and tax increases are planned, said Finance Minister Ingrida Simonyte in an interview published Friday in Austria’s Die Presse newspaper. The minister said she still hopes to avoid asking for IMF help.
The slide in Lithuania’s GDP raises new worries over the three countries’ currency pegs. Neil Shearing of Capital Economics called Lithuania’s decline “unprecedented.” He said he is re-examining his projections for Latvia and Estonia, and downward revisions are likely. The key question, he said, is “whether the currency pegs will hold.”
All three former Soviet states have euro-linked currencies, installed as the bedrock for economic development and to fulfill requirements for eventually adopting the euro. Fears are rising that these nations will be forced to devalue their currencies to a more competitive global level to revive their economies.
