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    Economic Turmoil in Latvia

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    Please kindly help on the below questions:

    The case explores how Latvia's economic fortunes have changed since 2004.
    At the time, the country was enjoying an economic boom, but critics worried that the economy was becoming overheated. By 2008, financial institutions were in trouble, and at least one major company was nationalized. Eventually, Latvia was pushed into accepting assistance from the IMF. Discussion of the case can revolve around the following questions:

    Q1: What kind of crisis was Latvia experiencing in 2008, a currency crisis, a banking crisis, or a debt crisis?

    Q2: If the IMF had not stepped in with support, what do you think
    might have occurred?

    Q3: Could the Latvian government have headed off the 2008 crisis? What actions could I have taken to do this? What might the economic and political consequences of those actions have been?

    Q4: What do you think the short-term consequences of the IMF policies will be for Latvia? What might the long term consequences be?

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    Solution Preview

    Q1: What kind of crisis was Latvia experiencing in 2008, a currency crisis, a banking crisis, or a debt crisis?

    The crisis was a debt crisis. The majority of Latvia's problem was related to the private sector debt. Specifically, the issue was related to mortgage debt, which was secured by the property and the personal liability of entire families as joint signatories (The information was obtained from http://michael-hudson.com/2012/06/lativa-no-austerity-success-extended/ "Latvia No Austerity Success (Extended)" Jeffrey Sommers and Michael Hudson). There was a decrease of the inflow of the foreign capital into Latvia. The domestic demand declined. The external demand shrunk as well. All of which, led to the GDP decreases (The information was obtained from http://www.mofa.go.jp/mofaj/area/europe/baltics_sem/pdfs/2-1_3.pdf).

    Q2: If the IMF had ...

    Solution Summary

    The kind of crisis for Latvia experiencing in 2008 is examined. The expert examines current crisis, banking crisis and debt crisis.