Is Latvia about to devalue? The economy’s dramatic expansion – 12 per cent in 2006 – has been at the expense of macroeconomic stability. Domestic demand is rampant, exports are losing competitiveness and the current account deficit has breached 20 per cent of gross domestic product. Meanwhile, high capital inflows have spurred unprecedented lending growth. Domestic credit to the private and non-bank public sector – just 18 per cent of GDP in 2000 – is likely to exceed 100 per cent of GDP by 2008, according to Standard & Poor’s.

The currency’s peg to the euro has provided stability – most crucially after Russia’s 1998 default – but has restricted the central bank’s ability to use monetary policy to control inflation. It has also encouraged the credit boom by reducing perceived foreign exchange risk. Moody’s says Latvia’s $20bn external debt equates to more than 100 per cent of GDP, 43 per cent of it short-term and owed by the private sector.