Page last updated at 06:57 GMT, Wednesday, 3 December 2008

Latvia's economic boom turns sour

Mark Broad
Business producer, BBC News, Riga

Vansu bridge, Riga
Latvia has experienced years of boom, but is now in recession

Over the last two years the small Baltic state of Latvia has collected a string of European records.

But unfortunately for the population of the country, they are not the sort of records that prompt lavish street celebrations and ticker-tape parades.

Up until a year ago the country, at various points, held the record for the fastest rate of wage growth, the steepest rise in house prices and the highest rate of inflation.

But just a few months on, things could not look more different.

Having seen its economy grow at a rate 11% in 2007, Latvia's GDP is now shrinking by more than 4%.

After a property boom, house prices are now falling at a faster rate than any other country in the world - down 24% in the last 3 months.

After years living in a world boom, Latvians are having to get used to a world of bust.

The once rampant economic 'Baltic Tiger' has been reduced to begging the international community for a loan of $6.5bn (4.3bn).

Property bubble bursts

Crunching through the snow at a new apartment block on the outskirts of Riga is property developer, Viktors Savins, of ARCO Real Estate.

Viktors Savins
Viktors Savins outside his new apartments outside Riga

"From the top of the market, we've had to cut the price of these apartments by around 35%," says Savins surveying the half-finished development.

Savins' company began work on the four-storey flats in 2004 while prices were still rising, since then the property market has fallen by over 60%.

The housing bubble was fuelled by ordinary citizens who were encouraged to borrow up to 10 times their salary by foreign banks who in turn were feeding off the global supply of cheap credit.

"During the boom investors were in the market trying to fulfil their own 'American Dream' of getting rich quickly by doing nothing," says Savins.

But with unemployment set to double to over 10% next year, many Latvians are for the first time beginning to understand the true meaning of the words 'negative equity' and 'repossession'.

Killing the stag

Riga's old town is populated by buildings from various episodes of foreign occupation - from the Germans in the 12th century through to Latvia's time as part of Soviet Union during the last century.

But since independence in 1991, a different type of foreign invader has occupied the city's cobbled streets.

Large groups of young men on stag parties began coming to the capital in the early part of the decade as the country was pulling away from the Soviet Union's shadow.

We used to be on the cheaper side, but if you're a British tourist or a Spanish tourist Riga has got expensive
Ivo Grubanov, Baltic Holidays

Riga provided the three essentials for the original Eastern European stag: cheap beer, inexpensive flights and a wide selection of strip clubs.

The local currency, the lat, is pegged to the euro and so during the early part of the decade it offered visitors from the UK a very attractive rate.

But as the pound has fallen against the euro over the past year, bars in Riga have seen takings slump as tourists opt to holiday at home.

Raimonds Tomsons is the sommelier at Vincents, one of Riga's most expensive restaurants and has seen the economy boom over the past few years.

"These times are very tough - many restaurants are closing as they simply don't have any customers - some only have three people coming in a day. It is very difficult to survive," he said.

Expensive beer

Leaning on the bar at Paddy Whelan's Irish bar in centre of Old Riga is Ivo Grubanov who organises tours for a British firm, Baltic Holidays

"We used to be on the cheaper side, but if you're a British tourist or a Spanish tourist Riga has got expensive," he said.

Irish bar in Riga
Paddy Whelan's bar in Riga has seen fewer stag parties

Grubanov caters for everyone from retired couples to rowdy stag parties, dispensing wisdom on everything from 12th century architecture to the cheapest city drinking holes.

And he's well aware of the cost that the Latvian government's insistence on staying pegged to the euro is having on his customers.

"It breaks my heart to bring young lads to a bar and tell them that a pint of beer costs five or six pounds," he says

"There's no good reason to have the lat to be so artificially high, and it would be much more sensible if we could float our own currency."

But with the Latvian government determined to meet the criteria to allow them to officially adopt the euro in 2012, it seems that it will be businesses like Ivo's that will continue to suffer.

'Orgy of credit'

The skyline of Riga is dominated by several glass-clad towers rising high above the more traditional pitched roofs of Riga's old town.

These shiny constructions house the headquarters of banks from across the Baltic Sea - mainly from Sweden and Denmark.

It's these institutions that are blamed for fuelling the recent credit boom. But it was a run on a domestic bank, Parex, that first pushed the government into the arms of the IMF.

Highest inflation rate - 17.9% in May
Highest growth rate - 10.3% in 2007
Biggest fall in growth in Q3 2008 - minus 4.2%
Fastest falling house prices in the world in 2008

Depositors in the bank withdrew their money after rumours circulated that the bank was close to collapse, forcing the government to bail it out.

For Alf Vanags, from the Baltic International Centre for Economic and Policy Studies, the origins of Latvia's latest economic palpitations are increasingly obvious.

"Over the last few years there has been an orgy of credit," says Vanags.

"People have been borrowing on the assumption that the boom years would go on forever - but now they've stopped and they're having to deal with it."

Snowstorms and arrests

After years of mild winters, Latvia is currently experiencing its coldest periods in years, with the latest snow storm leaving three people dead

Along with the miserable weather has come a new crackdown by the government on people they see as deliberately destabilising the economy.

Over the past few weeks, a university lecturer and a musician have been arrested after publicly casting doubt on the country's economic future.

And so, nearly twenty years after escaping the clutches of Soviet domination, it seems that Latvia's biggest challenge may yet be to come.

"I believe that it's like the turbulence you get in an aeroplane, we just need to hold tight and get through it," says Viktors Savins.

While he may well be right, it would seems that there are plenty of bumps ahead for Latvia in what is increasingly looking like a very hard landing.

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