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On December 8, Fitch Ratings announced that “Latvia and Lithuania’s ratings are under pressure from the sharp deterioration in public finances.” (Bloomberg) The same agency also just cut its rating on Greek government bonds, and Standard and Poor's shifted its outlook for Spain's debt from "stable" to "negative."

All that less than three weeks after Dubai defaulted on its debt through its subsidiary Dubai World.

You can see a common theme in all these stories: too much debt. But the rating agencies haven't been the only ones forecasting trouble.

Three months ago, on September 18, EWI's Jason Farkas published his regular "Weekly Insight" column inside EWI's Currency and Interest Rates Specialty Services. Here is an excerpt:

Baltics Ready to Blow
We talked about the situation in the Baltics earlier this summer, but I would like to cover the topic again to highlight my belief that a devaluation of the Latvian currency is nearly certain. Although it hardly sounds as if that event could affect the global economy, history tells us otherwise; the tiny country of Latvia may signal the return of risk-avoidance in the region and beyond.

When we first covered the Baltics back in June, we focused on the similarities between present day Latvia and 1997 Thailand. Both countries had a pegged currency, and their respective governments' coffers were being drained by a defense of the peg. In Thailand, the abandonment of the peg led to the Asian contagion that swept across the globe rapidly and affected all emerging and developed markets. Latvia is coming perilously close to devaluation because its tax receipts, and thus its ability to defend the currency peg, are plummeting along with its economy.

The International Monetary Fund loaned Latvia 7.5B euros late last year, but banks loan you an umbrella when it's sunny and demand it back as it starts to rain. When the likelihood of currency devaluation becomes larger, lenders will typically withdraw capital from the region, which leaves businesses and consumers without access to credit. Although foreign banks continue to talk about a continuation of their lending operations, currency devaluation could change that instantly.

Since 90% of Latvian loans are denominated in foreign currency, devaluation would make debt repayment impossible. Swedbank, the largest lender in Latvia, recently noted that 54% of its mortgage loans are underwater. Those are problems for the lender as much as the borrower, and devaluation would force banks to curtail loans as a replay of the 1930 Great Depression European banking crisis begins.

The OMX-Baltic Benchmark Index tracks stocks from Latvia, Estonia and Lithuania. All three countries are on the brink of devaluation as a result of economic turmoil, and devaluation in one would quickly spread to the others and throughout the region (Belarus, Ukraine, Bulgaria, the Czech Republic, Hungary and the Balkans). The Latvian currency is also showing signs of a potential turn.



A five-wave rally in USD/LVL ran from April 2008 into October 2008 unfolded as the USD gained 33% versus the Latvian Lat. The rally coincided with increased devaluation talk. Since that time, as devaluation talk receded, a three-wave corrective decline has unfolded. From here, basic Elliott wave analysis suggests a new five-wave advance to begin, probably as devaluation becomes reality.

It seems likely that we’ll see the USD/LVL begin to rally prior to headlines of problems in Latvia and the Baltic region, so watching the pair closely is advised. Once a turn has been made, one potential powder keg of problems will be ready to blow.

source HERE