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Is the Baltics boom set to bust?

As demand for financial services accelerates in Europe’s fastest-growing economies, several firms based in the Baltic republics have quietly been building impressive investment banking operations that now compete with larger Scandinavian rivals. This success story might have an unhappy ending, however: analysts have been sounding the alarm amid fears that Latvia might be about to devalue its currency. Lawrence White reports from Riga and Tallinn.

SOME LOCAL BANKERS are sanguine about recent upsets in Latvia. "It was no more than a dash of cold water," says Gene Zolotarev, global head of capital markets and investment banking at Parex Banka, when asked about the effect of a round of speculation about a possible devaluation of the lat. "Only certain sectors have been hit, like mortgage lending, for example, and that was fine for us since we’ve thought for a while that it was overheating."

External observers of the boom in the Baltic republics are less confident: ratings agencies Standard & Poor’s and Fitch Ratings have both warned that Latvia in particular faces a downgrade of its credit rating. Danske Bank analyst Lars Christensen released a series of reports in late February and early March, arguing that the government’s plans to curb inflation might be "too little, too late". The change in S&P’s outlook on Latvia’s long-term debt from "stable" to "negative" led to further pressure on the lat, but despite acknowledging this and other troubling warning signs, Zolotarev and his counterparts at other Baltic investment banks are upbeat about opportunities in the region.

"Our analyst has his own view," says Zolotarev.

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