Bad News Out Of Latvia And S&P On Bank Lending

Here are a couple of items that caught my attention this morning. Neither is particularly pleasant.

The New York Times reports that the government of Latvia has collapsed. Latvia has been much in the news the last few months as its economic downward spiral has caused significant civil unrest. Many feel that the country is indeed in a depression. Its GDP shrank at an annual rate of 10.5% last month and some expect it to actually decline by 15% this year.

Latvia has received significant aid from the IMF and the European Union of which it is a member. The aid required stringent budgetary measures and it remains to be seen if the new government-yet to be formed-will adhere to those requirements or give in to popular internal pressure. This could shape up as a first test of the staying power of the EU.

Market Watch reports that S&P warned that we may just be entering a credit crunch rather than being in the middle of one. The firm noted that there is a difference between perception and reality. The perception among politicians, the media and the general populace is that banks are lending less while the data doesn’t support a fall off in lending.

S&P explains that the disconnect may arise from the fact that credit is growing at an abnormally slow pace. In fact they contend it is growing more slowly than at any time since 1946. The contend that banks are replacing maturing loans but not adding much net new credit to the system. Combined with a moribund securitization market and a bond market that has seen little new issuance, the company feels that the prospects for limited credit constraining economic growth are very real.

The issue of whether or not banks are lending is one that needs to be resolved. I find it incredible that at this stage in the cricis the Fed and Treasury can’t say with certainty exactly what is going on. Less time spent on fanciful plans that really aren’t plans and more on getting solid data with which to make a real plan would be an excellent use of their time.

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