canary.jpgCoal miners used to take a canary with them, to help detect poisonous fumes. If the canary stopped singing, then they knew there was a problem. This led to the concept of “the canary in the coalmine acting as a warning of danger”.
Small countries can play the same role in the global economy. Last year, Iceland, “the first country to be run as a hedge fund”, provided early warning of global financial meltdown.
Now it may be Latvia’s turn. Its homeowners took on massive loans, 80% of them at a low rate in euros, at the height of the boom. Since then house prices are down 70%. And the economy is in such bad shape, that there are fears the government may have to devalue the currency against the euro. This would further increase homeowners’ losses.
Homeowners, not banks, vote in elections. So the government may now allow homeowners to write off their losses. According to the Financial Times, its “proposals would allow banks to collect only the current value of the property, rather than the original value of the mortgage”.
Swedish banks would lose billions under this proposal. German and Austrian banks are also worried, as they made vast loans in Central Europe on a similar basis. For the moment, the Latvian canary is still singing, as the proposal has not yet become law. But the blog will listen carefully, as the Latvian proposal is debated.