Kaiser chief still banking on Latvia?

Spare a thought, if you can bear it, for billionaire financier Dermot Desmond.

Nicknamed the ‘Kaiser’, Desmond paid an estimated €100m for a 33.1% stake in Latvia’s fourth-largest bank by assets, Rietumu Bank, back in 2005.

Ranked 746 on Forbes’ list of the world’s richest people, Desmond rarely puts a foot wrong and has his fingers in more pies than Dandy comic's Desperate Dan. But one wonders if this time his Latvian investment will play out as intended.

Latvia, Estonia and Lithuania all joined the European Union in 2004, and the good times were set to keep on rolling. Latvia’s GDP growth has powered ahead, early Celtic Tiger style, for the past decade, with a mere blip in 1999. Last year, it was close to 12%.

So at first glance, everything looks tickety-boo. Membership of the European Union will pump money into the Baltic economies, while so many of their citizens have left to find work elsewhere in Europe (14,000 Latvians in Ireland alone, according to the CSO), that the unemployment rate has dropped to 6.5%, compared with 8.6% in 2003, and 8.8% in 2004.

But something’s not quite right.

Latvia’s inflation and current-account deficit are soaring, and its overheating economy is causing concern that a meltdown would trigger a domino effect amongst its closest fledgling European Union members.

By September this year, Latvia’s inflation rate was a horrific11.4%, while banks have continued to open the vaults to borrowers.

The capital, Riga, is in the midst of a property price boom, although recent stamp duty changes have sought to calm it. According to figures from global real estate group Frank Knight, house prices in the city soared 61.2% in the 12 months to June 2007, compared to an average worldwide rise of just 9.6%. Riga’s been hot-to-trot for Irish investors too, keen to splurge on anything anywhere that has foundations.

And no more than elsewhere, there’s a concern that if hard-pressed and stretched borrowers begin to default on their loans, Latvian banks (which are mostly foreign-owned) could suffer big headaches, leaving shareholders, including, Desmond, reaching for the Panadol.

Latvia’s currency, the lat, is pegged to the euro, but there’s a feeling abroad that devaluation may be the way forward.

That currency peg, notes Edward Lucas, writing last week in The Economist, means that Latvia can’t raise interest rates to dampen demand.

It’s not all doom and gloom though. Lucas points out that the Latvian central bank has enough reserves to redeem every lat in circulation, while the country has “little foreign debt and a strong credit rating”.

How uneasy might Desmond be over his Latvian investment now? Perhaps not in the slightest.

Rietumu is headed by Tipperaryman Michael Bourke, who once worked for the Irish central bank, and he has steered a steady path for the Baltic institution, which is primarily aimed private banking facilities and financing for SMEs. All this has a whiff of a nascent Anglo Irish Bank.

Because it's not doling out mortgages to the masses, Rietumu would be partly sheltered from any collapse or stagnation in the local housing market. But any fiscal policy that would aim to tighten lending could have an adverse impact. Just how much though, is conjecture.

Last week Rietumu announced a net profit of €38m for the first nine months of the year, while assets rose to €1.4bn. Total 2006 profit was €41.5m, a rise of 15% on 2005. It’s likely that the full-year 2007 figure will come in ahead of last year, but by very low double-digit growth.

For Desmond, Rietumu is undoubtedly a long-term play. Last year he sold London City Airport for €1.1bn, having bought it a decade earlier for just €35m.

Rietumu is unlikely to post such an eye-popping return in 10-years’ time, but Desmond will most probably have found some real eastern promise, even if in the short-term things look a tad precarious.

http://edwardlucas.blogspot.com/2007/10/latvia-devaluation.html

http://www.rte.ie/business/2005/0829/desmond.html

http://www.rietumu.com/

http://www.iiu.ie/page1.htm

http://www.forbes.com/lists/2006/10/JLN3.html

http://www.knightfrank.com/ResearchReportDirPhase2/11177.pdf

http://en.wikipedia.org/wiki/Economy_of_Latvia

https://www.cia.gov/library/publications/the-world-factbook/geos/lg.html

http://www.thisislondon.co.uk/news/article-9440349-details/The+luck+of+the+Irish/article.do