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What went so wrong in Latvia?

As the European Parliament looks towards a rescue package for the stricken Latvian economy many people are now asking how the situation arose and the potential consequences for the rest of Europe. Latvia is a relatively small country although upon entry to the EU it did attract a significant number of investors, both short and long-term.

As a consequence there was a massive increase in house prices, general property prices and the economy was booming. However, unfortunately the vast majority of the rise was as a result of debt finance and as money markets around the world continue to operate at relatively low levels, compared to just two years ago, debts have got out of control for many people in Latvia.

As a consequence of growing debt and growing financial worries the economy has suffered which has placed many businesses on the verge of collapse. The Latvian government, once the darling of European investors, has now been cut adrift and is working with the International Monetary Fund with regards to a bailout.

Latvia is your stereotypical boom and bust new economy although in all honesty the collapse would have been nowhere near as brutal as we are seeing today, if we had not seen the credit crunch start in the US.

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