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Story Publication logo May 18, 2009

Latvia: Sobering Lessons in Unregulated Lending


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For more than a decade the ex-Soviet republic of Latvia was a poster child of seamless transition to...

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Multiple Authors

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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