Wednesday, July 30, 2008

Yesterday's post: a short version

I was discussing yesterday's post with a hedge fund manager (HFM) who gives that useful (and false) impression of being not too bright.

I starting explaining the Swedbank thing to him. You could tell he was only half listening.

Until I got to the statistics for Latvia. His ears pricked up when I said the current account deficit was well over 20 percent of GDP.

HFM: "Who are they stealing that from?"

BC: "Swedbank"

HFM: "So why didn't you say so?"


Well there is a reason that I didn't say so - which is that you wouldn't believe me if I posted the short hand. But what a 2o percent current account deficit means is that the AVERAGE PERSON spends 20% more than they earn.

This is of course impossible unless they are not going to repay it.

Borrowing without intention or ability to repay is the economic (but not moral) equivalent of stealing... and it doesn't matter what currency that borrowing is in...

This "theft" is so large that Swedbank is nearly insolvent.

And Swedbank management are steadfast in their belief that nothing is fundamentally wrong. Well they would say that, wouldn't they...


Unité 6.2 said...

How do I short Swedbank?

Andrew said...


Just discovered your blog and particularly like the coverage on the baltics. I spent a year living in Lithuania recently and will likely return in 09 to see what has changed since my last visit in 07, things are changing there quite rapidly.

I trade stocks only though have a family and real estate interest in any currency crisis in that region so will be checking back regularly!


Anonymous said...

John: the bit about spending 20%
more than they earn is a bit disingenous...DB.

John Hempton said...


Why precisely is a current account deficit of 20% meaning the average person spends 20% more than the earn disingenous? Them is the mathematics.

And it is visible - Riga is hardly a town rich enough to warrant 80 Bentleys.

It is absolutely true - and you can see it in the net borrowings running through Hansa, SEB et al...

Aig said...

Imagine a [very typical] situation: EUR 100k in unreported cash is taken to the country and spent to buy a car for EUR 100k there. Statistically it is EUR100k negative account deficit ... but, IS IT? :)

Has anybody spend more than he earned?

I guess that more than 20% of total value of purchases is finansed this way, so it remains open question what is actual vs statistical current account deficit.

True, there WAS a borrowing craze of Y2004-2006 with loans outstanding doubling in value every year. It's matter of the past. Although SwedBank is exposed to substantial risk from its Baltic loan portfolio, I'm sure it's far from critical to overall SwedBank financial health. Not least, because those loans are mostly in EUR.

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