Concern about sovereign debt has spread to the Baltic nations, with the European Central Bank saying they are at risk of a debt meltdown.
In a confidential report obtained by Bloomberg, the ECB said Latvia, Lithuania and Estonia must adopt stricter fiscal policy.
“(Otherwise) the authorities in the Baltic states may not be able to prevent a renewed emergence of macro-economic imbalances and a repetition of the boom-bust cycle,” the ECB said.
The Baltic countries have suffered the worst recessions in the European Union. After they joined the EU in 2004, the three nations went on a borrowing binge and increased wages by up to 85 percent.
The Baltic states have pegged their currencies close to the euro, and that’s a problem the ECB said.
“The experience of the Baltic states suggests that, for countries that have opted for pegging tightly their exchange rates, there is a significant risk that relatively low interest rates lead to excessive domestic borrowing and the emergence of asset price bubbles.”
The ECB also said the three countries need stronger bank regulations.
Worries about sovereign debt defaults have heightened in the wake of a credit-ratings downgrade of Greece and a ratings warning for the U.K.
But hedge fund legend George Soros says the reaction is overdone. “I'm sure that Greece will not be allowed to default. The same applies to the U.K.,” he told Sky Television.
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