Sovereign default alert

Sovereign default alert:

“yesterday EU-member Latvia saw its overnight interbank rate surge to a record 16.4% while the overnight deposit rate double to 24% after the country was unable to sell any debt securities at a local debt auction, according to its main stock exchange. The Latvian Treasury had offered to sell 20 million lats ($20 million) of July maturities, 10 million of September, December and June 2010 paper. None of this paper found any buyers.”

European banks have quite a bit of exposure to the Baltic countries and other Eastern European countries. Latvia will either have to drop its Euro peg and devalue; or hose away the rest of its FX reserves supporting the local currency, and then devalue. These countries borrowed a lot in Euros, which they have to trade in their domestic currencies to get, in order to pay back those borrowings. Obviously, when your currency plummets, that becomes a lot harder.

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