Lithuania's economy crashes, highlighting Baltic woes

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Lithuania's economy crashed a much deeper than expected 22% in the second quarter, data showed on Tuesday (28 July), further highlighting the crisis in the Baltic region even as neighbour Latvia reached a deal with the IMF.

Lithuania, like Latvia, is having to slash budget spending to stop its deficit getting out of control. Lithuania has so far said it can cope without International Monetary Fund (IMF) help.

Latvia agreed a new IMF deal on Monday (27 July) for further loans, after a last-minute crisis in getting the largest of five parties in the ruling coalition to accept the terms.

Lithuanian gross domestic product (GDP) fell 22.4% year-on-year in the second quarter after a revised 13.3% drop in the first quarter, the statistics office said.

Worst performing EU country

The figures made Lithuania the worst performing economy in the EU. Latvia, the weakest until now, is set for a second quarter GDP drop of 17%, according to a Swedbank forecast, similar to the first quarter's 18% fall.

Lithuania's president, a former European budget commissioner, said the second quarter GDP results was a "serious signal" the economy was contracting at a high speed, but said it was the result of an economic bubble in the past.

"The economy was boosted artificially, therefore we are seeing the collapse of the virtual bubble," President Dalia Grybauskaite told journalists. She said the government was doing all it could to manage the unprecedented economic fall.

"The third quarter will be better than the second one," Grybauskaite predicted.

For the full year 2009, GDP could contract 15-20%, the president said, citing economists' forecasts. Separate data showed retail sales plunged 25% year-on-year in June.

"The IMF deal [for Latvia] should provide some calm to the market, but that might very well be short-lived if the recession continues to deepen and the Lithuanian numbers are a confirmation that might very well be the case," said Danske Bank chief analyst Lars Christensen.

The Lithuanian GDP fall exceeded market expectations. A Reuters survey of six economists last week showed GDP was expected to fall 16.7% year-on-year.

Spending cuts

Lithuanian GDP fell 18.1% year-on-year for the first half of the year and totalled 43.4 billion litas ($17.96 billion), with construction and industry contracting most.

"We may see an even bigger contraction [in Lithuania] in the third quarter, when we expect the economy to hit the bottom, and for the whole year GDP could fall 20%," said Jekaterina Rojaka, senior Baltic analyst at DnB NORD bank in Vilnius.

"The second quarter results will definitely put more pressure on the currency and the country's credit ratings."

The finance ministry has forecast a drop of 18% for the whole year after 3% growth in 2008.

Lithuania's centre-right government has so far made do with slashing spending and raising taxes to plug a budget deficit it expects to hit 8% of GDP this year. It also recently managed to raise 500 million euros in a Eurobond issue.

No need for IMF loan - for now

It has said it will turn to the IMF if necessary, but does not see that need now. The IMF and European Union led Latvia's 7.5 billion euro rescue last year after its economy plunged and it had to rescue its second largest bank.

Lithuania has not had the same bank problems. Latvia on Monday got a further 1.2 billion euro European Union loan, half of which has to be set aside for financial stability.

It also struck a deal on an economic programme with the IMF to unlock another 195 million euros from the Fund and give a green light for other lenders, particularly the World Bank.

The woes of the Baltic region have hurt shares in Swedish banks, particularly Swedbank and SEB, whose losses have risen due to the downturn.

After earlier being up, Swedbank and SEB shares were slightly lower by early afternoon trade.

(EurActiv with Reuters.)

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