Analytics, Crisis, Economics, EU – Baltic States, Financial Services, Latvia, Legislation

Bauze believes that today's decisions could soothe financial markets, nevertheless, serious decisions will still be required in the future – Italy must also bring order to its finances, writes LETA.

"The decisions provide a breath of fresh air, however, those member states who experience financial difficulties, will have to continue balancing their budget revenue with expenditures and implementing structural reforms, for example – labor market reforms to improve flexibility," emphasizes Bauze.

The leaders also agreed to increase the capital adequacy ratio of banks to nine%. Bauze reminds that Latvian banks are fulfilling these demands with ease and their liquidity is higher than demanded. According to the Bank of Latvia, the capital adequacy ratio of Latvia's banking sector amounted to 17% in September, whilst the first level's capital indicator is at 14%.

Commenting on whether these demands could halt lending, Bauze pointed out, at the moment, capital is not a reason not to issue loans. The banks are keeping their free assets at the Bank of Latvia in the amount of LVL 500 million, earning only 0.25 to 0.375%. Foreign investors, businessmen and banks will start investing when Latvia's future will become clearer and it will be known that there will be no additional tax hikes. Bauze believes that the 2012 national budget will bring clarity.

According to Bauze, if there are no new tax hikes in 2012 and the budget's maximum deficit is bellow 2.5%, it is expected that the investors' activity will increase.

Bauze explains that today's proposals will not have a direct impact on Latvia, however, indirectly, they could have a positive effect, since gradual solution of the crisis and restoration of investors, producers and consumers' trust on Latvia's export markets will also facilitate manufacturing and export activities in the country.

The latest events on financial markets should not affect Latvia's economy and residents directly, as Swedbank's"chief economist Dainis Stikuts commented for Nozare.lv.

At the same time, Stikuts pointed out that even though Northern European banks are better capitalized, Greece's problems could echo in Latvia as well. If the European Union's large member states slip into recession, Latvia will certainly feel it through trade and financial markets.

Nevertheless, this impact will not be as unpleasant as in 2008-2009, explains the economist.

European leaders' decision on recapitalization of banks and increase of the European Financial Stability Fund, was a necessary precondition to strengthen the eurozone. It was long-awaited, but it is still not clear whether it will be sufficient. The decision's results are uncertain.

"Of course, Greece needed this decision to reduce its debt and allocate additional funding," said Stikuts and reminded that, at the moment, it is foreseen that Greece's debt will reduce from 160% to 120% of its gross domestic product by the end of 2020. However, it is still questionable whether these measures are sufficient, since Greece's remaining debt is still considerable.

"Greece will have to continue reducing budget expenditures to service its debt and restructure the country's economy, so that it would become more efficient and directed towards export. The latter cannot be implemented over a short period of time. Thus it is expected that the European Commission will continue to have strict fiscal control over Greece and the country's growth will be low," concludes Stikuts.

As reported, European leaders early today clinched a grand deal to pull the eurozone from the brink, convincing banks to take big losses on Greek debt while massively boosting a rescue fund to one trillion euros.

Banks accepted a 50-percent writedown on their Greek bonds to reduce the country's debt mountain by 100 billion euros after hours of tough negotiations at a summit that ran from Wednesday evening to early Thursday morning.

Also agreed in a four-point package of measures was an agreement for banks to beef up their capital buffers to absorb losses on Greek bonds, as well as pledges to tighten economic governance and fiscal discipline.