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May 18, 2009

Latvia: Sobering Lessons in Unregulated Lending

Kristina Rizga, for the Pulitzer Center
Images by Akim Aginsky

Latvia is an unusually dark and quiet place these days. As I descended into the Riga International Airport on May 6th, the city streets looked deserted. According to most Latvians I spoke with, there are about 50% less cars on the streets than last spring. People are unable to cover their car payments, and banks are taking their cars away. Banks try to sell repossessed cars on the lot As a result, the first signs of unpaid debts that showed up in Riga were car lots with repossessed vehicles.

It also seems as if someone forgot to turn on the lights at night in Riga. About half of the streetlights are off. Hundreds of stores are closed or don’t have lights in their once opulent storefronts. For the first time since Latvia broke off from the Soviet Union, even the most powerful symbol of independence and National pride – the Monument of Freedom in downtown Riga – is halfway lit.

The main two daily newspapers on May 12 devoted their entire front pages to a huge graphic that shows an 18% drop in the GDP of the first quarter of this year. The economy of the European Union overall shrank 2.5% in the first three months of 2009 – the worst indicator in decades.

Darker streets help fuel petty crime that is on the rise in Riga. Almost every woman I talk to can think of a female friend whose handbag was recently stolen. When middle-aged women mention this new outcome of the economic crisis, they say it feels just like the ‘90s – when Communism in the Post-Soviet bloc countries collapsed creating chaos and lawlessness.

The workers in a local watchdog non-profit group Delna tell us that the current crisis will soon create new – much less visible – opportunities for higher-level crime by the powerful and highly corrupt political elites.

The daily local Farmer’s Market that sells cheaper produce than the large Scandinavian food chains is filled with older people. Inese Kidene, a saleswoman in the poultry section, says that she’s seen about a 30% increase in customers since the economic crisis hit Latvia. But even though there are more people, she makes less money because Latvians buy less and focus on cheaper products.

A social worker in a local homeless shelter tells us she’s seen more middle-aged people coming in lately. Normally easily employable, these people are now unable to find work. As I walk through the city, it feels as if most activities have come to a complete standstill. The only exception seems to be the historic district of Riga where tourists – attracted by Latvia’s falling prices – keep the lights on in the pubs and hotels. The price of a pint of beer is now about $2 instead of last year’s $7-10.

A bartender at the local club Depo, Andis Retejums, tells us that the number of tourists in his club is about the same, but the number of local clients has decreased by about 50% compared to the same time last year. He can think of 16 clubs and restaurants that closed in the last three months in his neighborhood. When people sit at his bar counter, almost every conversation he overhears starts with, ‘Are you working right now?’

In a nearby bar, I meet with Oskars Kurdeko, 25, a percussionist who works with two local pop-rock bands, Putnu Balle and Tumsa. Oskars Kurdenko, 25, took out a loan on his apartment in 2007 that he is now unable to finance. Kurdeko’s story provides an insight into some of the causes that have forced the Latvian economy to take one of the sharpest downturns in the world.

In 2006, the global bubble was inflating and stockholders were demanding increasingly higher returns on their investments. When Latvia joined the E.U. in 2004, the banks loosened their lending requirements. They weren’t checking people’s real incomes as vigilantly as before. In fact, no proof of any kind of income in some banks was required.

In 2006, some were offering larger loan amounts than the market value of an individual’s apartment. Aizkraukles
Bank, for example, was offering cheap financing without a down payment and adding a small loan to help their clients buy furniture. In 2008, Swedebank was offering a 0.4% interest rate for apartment-buyers. Norvic Bank in Riga was running a television advertisement in which a family goes through a McDonalds-like drive-through and asks a sales clerk for a variety of credits – one for a car, one for an apartment and one more for a trip to Egypt. From billboards to newspapers to TV ads, Latvians were bombarded with advertising inviting them to join the departing gravy train and gamble all of their investment dollars on an already inflated real estate market.

Kurdeko, only 23 years old in 2007, had a healthy income playing up to 25 concerts a month. He thought this level of work would continue indefinitely. In 2007, he decided to take out a $272,000 mortgage on his two-bedroom apartment in Riga with no down payment. His monthly mortgage payment now is $1,500, much more than he currently makes.

As the economic bubble burst, his gigs dried up and income went down by 70%. “Eventually, I hope to find work somewhere abroad that will allow me to both improve my percussion skills and make enough to pay my mortgage,” he explains when I ask him how he plans to keep up with his creditors. In the meantime, as for an increasing number of Latvians, his credit payments will be late.

Since unemployment is also growing in Europe, it’s hard to imagine he’ll find steady work that pays enough to cover both his mortgage and living expenses. He doesn’t want to foreclose on his property either, as Latvia’s bankruptcy laws don’t really wipe out anyone’s debt.

If the bank takes away Kurdeko’s apartment, they will be able to sell it for probably about 30% of its 2007 value. Unlike in the U.S., Kurdeko will then owe the difference to the bank. If he gets a job, the bank will suck up most of that income. As a result, young people tell us they’ll be forced to find jobs for cash to both save on taxes and be in control of their income.

As more people are either losing jobs or experiencing deep pay cuts, they are expected to foreclose on their properties. The unemployment benefits will run out this fall. As more people foreclose on their apartments, there will be more and more under-the-table work for cash. The Latvian state will lose enormous tax revenues forcing them to close even more schools and hospitals. That doesn’t bode well for the prospects of a speedy recovery.

Above images:

(top) The first signs of an economic crisis -- car lots where banks are trying to sell repossessed vehicles.

(bottom) Oskars Kurdeko, 25, took out a loan on his apartment in 2007 that he is now unable to finance.

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Comments

Seems somewhat exaggerated!

Hello, I think - You have described situation absoltly wrong. This ir only dark side of Latvia, but we have also bright side, but You didn't want to see it.
Best regards, Agrita from Riga, also journalist

a bit exaggerated... but not a lot... there are action in the streets at night, the prices in old-riga are prety much the same as they were. the mersedes and X6 ar cruising the streets. but that is for high-end society.
middle society feels the crisis. many have lost the jobs, they are living on savings and government payments, but when those payments and savings will end, it is going to be.... "nice"....

I am sorry dear "journalist", but if that is how you work in USA, than I feel really sory for the readers, who are receiving such information from you "professionals".
"The unemployment benefits will run out this fall" what dou you mean by that? Noone is closing schools or hospitals just to save some budget money, but these two sectors needed structural changes very much a long time ago and this world wide crises is a good posibility to fix this... and so on...

A little bit exaggerated, it is very sadly for us - Latvians, but overall it is truth. The problems with Latvia are uncontrolled and unpunished corruption from so called political parties (groups of economic interests, controlled by oligarchs). Democracy, rule of law works only formally on paper, in reality situation is entirely different. Oligarchs almost entirely rule and control the parliament and government. They make laws in their own interests, not in nations, but they (oligarchs) not take any responsibility for their political and economic actions. By the way our president (he is a physician, who was involved in bribery) was appointed in secret unofficial meeting in Riga Zoo by oligarchs and economic group leaders. Only after their acceptation parliament was allowed elect him. I hope secret police service will not arrest me for my comment.

Excuse me but nobody is closing schools or hospitals here, so this part of report is a bit incorrect

Just a pitty...Seems like this article was conducted to be so negative. I think that I belong to most vulnerable part of active society - I am a guide and interpreter (my wife is musician), so directly depending on economic situation in country. Though situation from inside does not looks so bad. We hawe less work, but we hawe, less money though money. Wea are happy. Thats it.

nasing speshl...
It look's like only latvians care about that "exaggerated" thing. Shame! I am ashamed. About myself, about our politicans, about our cheap sex tourism industry, about our blindness to things that realy matter, about that odd ego of our's - exaggerated... silly, poor little peoples, me too.
It is long journey for latvians to grow up. unfortunately

Hello Agrita,

I went to Latvia to report on how one of the sharpest economic downturns in the world is affecting Latvia. I agree with you -- there are many positive developments in Latvia, but these dispatches are documenting how the economic crisis is impacting ordinary citizens. I plan to write a longer analysis – of both the good and the bad – for The Nation magazine soon. We’ll post it on the site when it’s published.

Government suppose to close schools and hospitals, which are in rural areas and also new built hospitals; suppose to reduce the amount of teachers, policemen; suppose to reduce the wages of teachers, physicians, policeman; suppose to reduce social security payments for retired. Isn't that closing? As I remember GNP biggest fall in Argentina 2000-2003 was only 11%? In Iceland GDP fall is 12%, in Ireland - 7% and now they call it depression. May be we have only some slight downturn, like one of our former ministers of finance said in interview to Bloomberg: “nothing special”. The fall of GDP in first quarter is 18%, isn't that economical and social disaster? Unemployment in Latvia now is 11%, my predictions it will reach 20 - 25%. …nothing special…. And we have not yet reached the bottom. We have to remember we are emerging market or undeveloped country and undeveloped countries will recover slower from recession than developed countries. There are processes called deflation and stagflation after such dramatic downfalls in economics. Remember Japan decade ago (1990 – 2003) or Finland from 1990 till 1994? But … nothing special…

Hello Kristine,

There are over 100,000 unemployed in Latvia right now and unemployment benefits for some of them will run out this Fall, as you can see in this http://www.diena.lv/lat/business/hotnews/vai-ir-dzive-pec-bezdarbnieku-pabalsta?comments=2 article in Diena.lv.

As far as closings of the schools and hospitals, I am just stating a fact that could negatively impact the most vulnerable people – especially those who live in the country side and can’t afford to go to a large hospital in the nearby city. I did hear from many Latvians that structural reforms are necessary in schools and hospitals.

Kristine,

I had to think about this before writing. Of course, things are dark now. No question and it is stupid (to me) to take up the "crisis is an opportunity" banner too easily and lightly.

That said, it seems to me that you are writing about the every day experience from 1) just one place - Riga 2) that the places that you mention are not really representative and, 3) that you substitute lots of "everyone I talked to" for any sort of substantive information and analysis.

I'm an American who has lived here for 9 years now and I have a couple of suggestions for your return trip(s). Broaden your horizons - get out of Riga. My wife's family lives in Gulbene (2.5 hours from Riga) and their experiences are different from what you say here. Talk to some people in officialdom (or near officialdom). Some have insight and are not hesitant to tell the truth. Specifically I would reccommend Ojars Kalnins (he is LV/American) at Latvias Insitutes. He is pretty straightforward about what is going on. And, get out of the clubs. What fraction of the "real people" that you are interested in actually ever frequented the clubs? Talk to more people in more sectors. We work in the NGO (www.disleksija.lv)sector (I know that you talked to Delna) and I suggest that you talk to people from the non-political NGO world (such as the Latvian Citizens Alliance).

Thanks for being here.
Tom

There is crisis in Latvia and it is serious! Most Latvians just dont see it yet. The real social pressure will just come! It is truth, that all the unemployed cannot find a new job and that they are living from money they receive from government. But this money is paid just for 9 months. So the real picture will show up in winter 2009/2010.

What the author did not mention, is that there are a lot of rich people/ businessman who transfer all the problems to the poor. For almost everybody I know wages are reduced from 30% - 60%, but they are lucky, because they still have the job. The rich, the corrupted politicians and everybody who feeds on this still live fine, because they live on taxpayers money.

I wouldn't know about "dark", since I live in the centre of the city and as far as I've bene able to notice, lights are still on during evenings/nights.

Farmer's Market (I assume the city's Central Market was meant) has indeed as of late become a much better shopping place with the real farmers actually selling their own produce there, instead of shifty characters reselling China-made-everything that was the case just a year ago.

It is now well worth the inconvienience of not going to a supermarket, as you can get both meat and vegetables in the market now that are both better quality and cheaper than in supermarkets.

On the rest of the article, I would think the author has hit the nail on the head both on the reasons and implications.

Unwise lending and borrowing and boasting of GNP that consisted mostly of people selling everything each to other on borrowed money is the main reason we are now in trouble.

And now the fact that you still owe bank the money even if you declare yourself bankrupt is what makes people unable to make a fresh start, but requires them to fiddle around in a suspended state.

I see more value in the users comments that the authors original article. It has a bit too much of a sensation starving flavor. Superficial and exaggerated up to the point of seeming arrogant. I would expect a better job and a more in depth investigation from a person who has lived in Latvia and knows the culture.
Does the author implicate that banks and current world order is the aggressor and people merely victims? Yes there is a crisis, yes there is problems for many people. Many people that were poor now have to struggle for survival. But let's not forget that a large part of people who now are complaining have been spending much more than they can afford using loaned money on expensive cars, flats, electronics and travel. I haven't heard a single person saying - I should have saved and not spent so much. It seems so "US American" now to blame banks, government, McDonalds coffee and tobacco industry.
I think main problem is not to let the crisis creep form your valet into your mind. I want to believe Latvians are still good at that and on June 23. Ligo festival the fireplaces will burn all over Latvia the people will sing, dance, celebrate and love.

There are really many problems in Latvia and in the Autumn it will get worse. If some of those who comment do not notice that, you probably just do not have friends and relatives who have been cut wages 40% or have to work just 4 working days. For people who have debts and do not have any extra money - it is really crisis!!!

One other thing that confuses me - where were all of these easy to get loans when we were buying our flat 5 years ago? We had to prove everything up one side and down the other. I know that some people are in trouble with credit, but I think that comes more from individual cheating than from the bank side.

It is true though that some people who thought that they were "investing" were just flipping real estate. I was involved in one project for firms preparing themselves for strategic investing and it was quite difficult to filter out all of the people who just framed investing in terms of real estate.

People like me who said it couldn't last were depressing and naysayers. Now that we say that we should be careful with all of the "radical reforms" we are whiners who just don't understand. Can't win.

I also could tell great stories of friends who get money to build in the new single-family houses in the suburbs, handed over their money and then the builders go belly-up. Money lost. Do those people have the right to be angry?

If the mission of the Pulitzer center is to focus on topics that have been mis-reported, this article sadly only contributes to a misrepresentation of what is happening in Latvia. Yes, Latvia has been hit hard by the global and local economic crisis and many people are suffering as a result. But opinions from the street, while emotionally compelling, do not reflect the true situation. While many of Rizga’s observations support the themes she wants to convey, they are factually incorrect.

1. The Freedom Monument is always halfway lit at night and has nothing to do with an economic crisis.
2. Streetlights are systematically turned off not because of the economy, but as part of a broader energy-saving policy. (Latvia has the lowest CO2 emission per capita in the European Union.)
3. Closed stores are obviously no longer lit. But I’m not aware of any open store, opulent or not, that fails to illuminate its display windows.
4. There are less cars on the street, not just because of foreclosures, but simply because once profligate companies are now cutting back on extravagant car leasing policies.
5. It is absurd to state of Riga that ‘most the activities have come to a complete standstill”. The center of Riga houses government offices, businesses and tens of thousands of residents, and all continue to function, despite cutbacks and downsizing. Shopping malls don’t lack for people as well. Had the author arrived in Riga on May 1, she would have seen thousands of people celebrating Latvia’s 5th EU anniversary in the heart of the city.
6. Thanks to the economic crisis, the Latvian government is undergoing a major reform of the public administration system. The goal is to eliminate waste, duplication and excess bureaucracy. Hospitals and schools are not being closed, but will be consolidated and optimized to provide better, less costly service. Services are not being reduced – just unnecessary overhead is finally being eliminated.

Finally, please do not draw broad conclusions about the country as a whole by asking a few ‘people in the street’. Darkness is not an objective fact, but a state of mind. If you come looking for darkness, you will find it.


Ojars Kalnins
Latvian Institute

Ojar,
Please, "Hospitals and schools are not being closed,"? What you may call consolidation, others call closing. We were in Aknīste a few weeks ago and the vidusskola there will be taking in the remnants of two "consolidated" schools in the autumn. Only, they don't call it that, they call them closed. The Aknīste school cannot hire a single teacher from the other schools. The rubrics and decision process used by IZM is shallow and flawed. They misrepresent data and statistics and make causal links between policy changes and outcomes that are simply not substantiated. One incredibly stupid example from the IZM proposal is that making it easier to retain a kid for a second year (in their proposal!) will save money!

And much of that unnecesary overhead that you are okay with losing is the insitutional memory that we have so little of. It has taken nearly 20 years to even get to the point where we are. How long to regain what we are kicking out the door in the name of consolidation? I worry about this.

As for hospitals and the fees imposed - in my own family my mother-in-law is now scared of what will happen if she needs to be hospitalized. She will possibly put off needed care and become sicker as a result. The new co-pay regime means that she will exhaust every santim in less than a week.

Services are being reduced. Walk into any VID office and imagine it with 1/3 fewer employees. Their service is sometimes good, often mediocre. After the loss of 1/3?

I and many people are not pessimistic about our future here, but we are realistic. These changes are coming so fast, that we can't reasonable evaluate them. This adds to it all.

I do agree with you though, that there is much that outweighs the very surface picture that the author drew, but we can't fight it with our own evasions.

Tom Schmit

Kurdenko's apt is only worth 30% of its 2007 value? Where the heck is it that it has lost 70%? I live in a crappy Lietuvas projekts house and we are still only down about 20% vs the highest point in the market. Who told you that? Did you check the claim?

tom schmit

Dear Readers – thank you for your thoughtful comments. I want to point out two important things. First, this is just one, initial blog post that includes my reflections four days into our trip – I pointed out things that seemed different to me, personally, compared to every other year I came to visit, and overarching themes I heard from people I talked to. It’s just one blog post and one, limited perspective. It certainly does not purport to explain everything about the crisis, nor provide a comprehensive picture of Latvia today.

Secondly, in the coming months, I plan to write more blog posts, and more in-depth pieces in which I will include a lot more reporting, in and outside of Riga, interviews with experts, as well as other ordinary Latvians who’s lives have been deeply affected by this crisis, and I will of course reference studies and research that are relevant to my reporting.

In the meantime, I hope you will check in, again, in the coming months and continue this fruitful discussion.

Dear Tom Schmit – In response to your comment, “Kurdenko's apt is only worth 30% of its 2007 value? Where the heck is it that it has lost 70%?” Please refer to this article that mentions that the average price of an apartment in Riga has decreased by 64%. http://www.nra.lv/zinas/22944-zemakais-punkts-ipasuma-cenu-krituma-vel-nav-sasniegts.htm

Dear Readers – there seem to be a lot of questions around my statement that hospitals and schools are closing. 13 smaller, countryside hospitals were closed in January. (http://www.nra.lv/zinas/22539-lidz-gada-beigam-slimnicas-samazinas-vel-1000-gultasvietu.htm) We visited one of them in Adazi and spoke to its head Peteris Pultraks. You can see a photo in this slide show.

As far as schools, please refer to this article in the Baltic Times. (http://www.baltictimes.com/news/articles/22794/) “... the Cabinet of Ministers on April 24 that revealed up to 4,000 teachers could be out of work by Sept. 1. … Education and Science Minister Tatjana Koke from the Union of Greens and Farmers confirmed between 2,000 and 4,000 teachers could be out of work as of Sept. 1 this year. School closures have also been confirmed, but Koke would not comment on how many students will find their schools closed come Sept. 1, saying the decision rested with local governments.”

Thanks kristina. Shows what happens when you rely on your personal impressions!

And with schools - please look at the newest from Koķe - they now say maybe up to 1/3 of teachers will be cut.

tom schmit

Kristina,
I can't find an email for you here. I just looked at your bio and wonder if you might be interested in speaking to our youth group (Pro Futuro LV) about political engagement. We are trying to involve them in our work in advocating with IZM specifically.

thomas.j.schmit@gmail.com

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