One of the things about fixing your currency is that you can’t print whatever you are fixed to.
Indeed that is the advantage of fixing your currency. Fixing your currency forces and monetary credibility because it effectively removes the printing press as an option. But if you don't respect that force you pay a nasty price.
Its iconic – but when a country with weak economic credentials fixes its currency it tends to have an economic boom. The fixed currency in
But – if you don’t maintain discipline on fiscal and monetary policy you hit the wall very hard indeed. The usual response to a downturn (just loosen monetary policy) becomes unavailable. As a result you get smashed.
So it is with this in mind that I report two stories from the Baltic Business News. The first one might have been triggered by my blog (which has been somewhat controversial in the Baltic States):
The Estonian CEO of Hansabank, Priit Perens, told aripaev.ee that in case loans have been handed out in EEK, devaluation would make the situation easier, but as loans are based on EUR, devaluation would bankrupt Estonian economy.
“Traditionally, ca 70-80 pct of loans in
To the question, whether Swedbank has been adding addition pressure to Hansabank lately, Perens responded with a curt: “No.”
Followed quite literally by the second article:
In 2009, pensions are growing by EEK 2.7 billion when compared to this year, taking up 21 pct of state budget. The state, however, can’t cover the growing pensions from social tax.
Pension index is recalculated every year and it depends on the yearly growth of consumer price index and accruing of social tax. That is why in the coming year a fifth of the planned state budget (EEK 20.4 bln) is taken up by pensions. The state can’t cover all of it from social tax, the Ministry of Finance shed light to the state budget, writes aripaev.ee.
Both inflation and the growth of social tax have been higher than expected, which is why pensions will be growing more than usual in the coming year as well.
The Ministry of Finance isn’t worried about only pensions. The capacity of foreign investments, co-investments and setting aside money for health insurance fund are jumping higher as well, but most of the money accrued to the state budget has a certain goal. Meaning that the funds can’t be used to cover holes, even if the state treasury has the needed amount of money.
You can’t make this stuff up but the last article is a little strong. Estonian politicians still hope to balance the budget.
The State is bankrupt and it can’t print money because the currency is fixed.
It can’t borrow because people expect it to devalue. They are about to have pretty severe austerity measures right into a recession...
The interest rate in Kroon is much higher than the interest rate in Euro – so the domestic population borrow in Euro.
What can I say other than so long and thanks for all the fish.
This is too familiar…