Customers at a Citadele branch in Riga
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Latvia’s first public offering in more than a decade was postponed this month, dealing a blow to hopes that the Baltic states might be nearing a psychological turning point in the wake of the global financial crisis.

Citadele Banka called off its plans to list in London and Riga, citing “unfavourable market conditions”.

“An initial public offering could have been a very good sign for the local stock market, but the price was too high,” says Edmunds Rudzitis, an economist at Swedish bank SEB.

Citadele’s owners, a star-studded consortium boasting former Federal Reserve chairman Paul Volcker, Egyptian billionaire Nassef Sawiris and former head of the World Bank James Wolfensohn, had hurried to market after purchasing a 75 per cent stake from the Latvian state just six months earlier. But the bank, the country’s fifth-largest by deposits, was forced to extend the offer subscription period and called off the IPO altogether on November 11 after roadshows failed to deliver sufficient international investors. Guntis Belavskis, chairman and chief executive, declined to speak to the Financial Times.

The IPO had been intended to mark a turnround for Citadele, a “good bank” carved out of the ruins of Parex, which exploded spectacularly in 2008 during a deep crisis in which Latvia was bailed out by the EU and the International Monetary Fund.

The market was abuzz with rumours that other banks were willing to sell some or all of their businesses, according to Mr Rudzitis, with speculation that Citadele could use an injection of funds to scoop up assets such as Danske Bank’s Estonian business, or target rivals such as Siauliu Bankas. Siauliu shares, which had jumped on news of the IPO, lost 5 per cent after it was suspended.

But Citadele’s new owners appeared to misjudge investor appetite. “The timing was OK, but the price was too high,” Mr Rudzitis says. Under Tim Collins, the board chairman and chief of US advisers Ripplewood, the group valued the bank at about five times the sum it paid the state for its stake in April.

Latvia in particular has seen recent growth rising faster than elsewhere in the EU, and is the most rapidly growing economy of the three Baltic states, even if it is the smallest. In 2011 GDP rose 5 per cent, in 2012 and 2013 by 4.8 and 4.2 per cent respectively. This has slowed to an estimated 2.4 per cent this year.

Unemployment has halved from its peak of more than 20 per cent in 2010, with joblessness in the capital Riga approaching just 5 per cent. “Wage growth is strong, which supports the idea the country is at full employment — all the unemployment is structural,” says Morten Hansen, head of economics at the Stockholm School of Economics in Riga, and a member of Latvia’s fiscal discipline council. Indeed, unit labour costs are growing faster than any other country in the EU at about 7 per cent.

“We have warned not to repeat the mistake of 2005-07, when the economy saw overheating and wages growing 35 per cent on an annual basis, way ahead of productivity growth,” Mr Hansen says. After a credit-fuelled bubble burst in 2007, austerity policies saw incomes collapse and emigration by more than 100,000 citizens from this country of barely 2m. But it has since been held up as an example to profligate southern European states that short-term economic pain can deliver long term gains.

“Latvia’s economic policies have not only enabled a fast return to growth, but also allowed it to restore the trust of investors and introduce the euro [in January 2014],” says Janis Reirs, the finance minister, pointing to a successful eurobond issue in September and improvement in Latvia’s credit rating.

The eurobond issue “was a significant moment” that demonstrated the country could attract money from large investors on capital markets, Mr Hansen says, but Latvia remains the “strongest among the weak” in the Baltic region.

With foreign investors taking a wait-and-see approach to Latvia as relations between the EU and the Baltics’ biggest trading partner, Russia, continue to be strained, the failure of Citadele’s IPO has weighed on the prospects for growth.

Depreciation of the Russian rouble has made goods from Latvia twice as expensive. “The low-hanging fruit has been picked, so the amount of catching up that needs to be done is more difficult,” Mr Hansen says.

Efforts to persuade young émigrés to return have not yet succeeded and there has been a steep decline in young people on the labour market, with numbers falling on average more than 5 per cent each year in each of the past five years. In 2005 every fifth person was aged 13 to 25. In 2015 it is only 14 per cent.

GDP is also still not back to pre-crisis levels. The lesson of the Irish Republic is that a reasonable level of GDP per capita and good employment prospects are needed for the diaspora to return.

Mr Hansen says: “We are waiting to see if something like that can happen here.”

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