DECEMBER 1, 2008, 4:44 P.M. ET | [ via Wall Street Journal ]
How to Combat a Banking Crisis: First, Round Up the Pessimists
Latvian Agents Detain a Gloomy Economist; 'It Is a Form of Deterrence
By ANDREW HIGGINS
RIGA, Latvia -- Hammered by economic woe, this former Soviet republic recently took a novel step to contain the crisis. Its counterespionage agency busted an economist for being too downbeat.
"All I did was say what everyone knows," says Dmitrijs Smirnovs, a 32-year-old university lecturer detained by Latvia's Security Police. The force is responsible for hunting down spies, terrorists and other threats to this Baltic nation of 2.3 million people and 26 banks.
Now free after two days of questioning, Mr. Smirnovs hasn't been charged. But he is still under investigation for bad-mouthing the stability of Latvia's banks and the national currency, the lat. Investigators suspect him of spreading "untruthful information." They've ordered him not to leave the country and seized his computer.
Finance is a highly touchy subject in Latvia, one that the state tries, with unusual zeal, to shield from loose tongues. It is a criminal offense here to spread "untrue data or information" about the country's financial system. Undermining it is outlawed as subversion.
So, when the global financial system began to buckle this autumn, Latvia's Security Police mobilized to combat destabilizing chatter about banks and exchange rates. Agents directed their attention to Internet chat rooms, newspaper articles, cellphone text messages and even rock concerts. A popular musician was taken in for questioning after he cracked a joke about unstable Latvian banks at a performance.
Just one problem: Much of the speculative buzz now turns out to ring true.
After insisting its banking sector was healthy, Latvia last month took over the largest locally owned bank, Parex, to save it from collapse. After denying it needed aid from the International Monetary Fund, the government is now in talks with the IMF.
Finance Ministry officials acknowledge that secret police won't save the country from economic crises. But they do believe Security Police vigilance makes the public think twice before spreading uninformed gossip about banks.
"It is a form of deterrence," says Martins Bicevskis, Finance Ministry state secretary.
Mr. Smirnovs says he will certainly be "more careful" about voicing his opinions in the future. But he scoffs at the use of security agents "as a medicine that only makes people more worried." Until his detention, his bleak view of Latvia's financial prospects was known only to his students and readers of small newspapers in his hometown of Ventspils.
"Now everybody knows who I am and what I think," he says.
The ingredients of Latvia's troubles are much the same as elsewhere: a credit crisis, a slump in property prices and a severe economic slowdown. But in a tiny nation long wary of big neighbors, primarily Russia but also Sweden, economic woes are never just about money.
"We are a small country, and panic would have very grave consequences," says Teodors Tverijons, head of the Association of Latvian Commercial Banks. Preventing uninformed gossip, he says, is a "matter of state economic security."
"It is regarded as unpatriotic to criticize," says Alf Vanags, director of the Baltic International Centre for Economic Policy Studies.
Early last year, Mr. Vanags held a news conference and sounded the alarm over Latvia's ballooning current-account deficit. Soon after, he says, he got a call from the Security Police. "Within an hour they were on the phone asking to see my materials," he recalls. Mr. Vanags says he handed over his data and never heard anything more.
The Security Police don't comment on the specifics of their investigations. But, says spokeswoman Kristine Apse-Krumina, the agency has a duty to "gather information" and take "preventive measure...to avoid destabilization of the financial situation."
Virtually no one here worries that Latvia is reverting to the ways of the Soviet Union, when the KGB hunted down dissidents and kept the population in cowed silence. Unlike Russia, where state-controlled media largely ignore bad news, Latvia has a vibrant free press. Mr. Smirnovs's detention was front-page news and created an uproar. This, says the economist, "shows that we are still living in a democracy."
Latvians have good reason to be jumpy about their banks. In 1995, depositors lost upwards of $800 million when the country's biggest bank, Bank Baltija, collapsed and nearly felled the entire banking sector. Its senior executives went to jail.
But authorities also have cause to be wary of unfounded gossip. Latvia last year was suddenly awash with rumors of an imminent devaluation of the lat, which is pegged to the euro. Citizens, ignoring government reassurances, rushed to convert their cash into euros. The central bank spent heavily to sustain the currency peg. There was no devaluation.
Suspecting foul play, the Security Police launched a hunt for the source of the devaluation talk. It eventually found the culprit but quickly let him go. "He was in a drunk condition when he spread the rumor," says the Security Police's Ms. Apse-Krumina.
Authorities responded to the affair by demanding tougher curbs on finance-related rumors. Human-rights lawyers protested. But a year ago, the criminal code was amended to outlaw the dissemination of "false information about the financial system orally, in writing or in any other manner." It mandated jail terms of up to six years.
In Latvia's Soviet past, officials routinely blamed their problems on saboteurs or other scapegoats. "This is part of our political culture," says Sergei Kruks, a media-studies lecturer. "If the state doesn't have a solution, it has to find someone to blame."
Latvia's economy took a nose dive this year. After enjoying the highest growth rate in the European Union, which it joined in 2004, the country is now in deep recession. Its economy shrank 4.2% in the third quarter.
In late September, the nation was gripped by feverish talk of a banking crisis. Much of the initial worry focused on Sweden's Swedbank, the biggest bank in Latvia in terms of assets. Maris Avotins, the head of Swedbank's Latvia operations, found himself under siege. "Customers big and small were going into our branches and asking: 'Are you in trouble?' " Deposits, he says, slipped by about 3%.
Parex, a big locally owned rival, started to lose customers, too. It lost more than 5% of its deposits in October. Anxiety then spread to the solvency of the country as a whole.
It was at this point that Mr. Smirnovs, the economist, took part in a discussion organized by a small local newspaper, Ventas Balss. Predicting serious trouble ahead for Latvia, he said: "All I can advise is this: First, don't keep money in banks. Second, don't keep money in lats."
Shortly afterwards, on Oct. 6, the Security Police opened a criminal investigation into people who "spread rumor and untruthful information."
By late October, Swedbank, fortified by guarantees announced by the Swedish government, started to lure back customers. But Parex, Latvian-owned and therefore unprotected by the Swedish state, sank deeper into trouble as depositors continued to flee.
Fearing the worst, Latvia's government took a 51% stake in Parex last month. It then asked both the European Union and the IMF for help. A few days later, Mr. Smirnovs was picked up outside his home by two plainclothes officers from the Security Police.
Gene Zolotarev, an American financial manager who has lived in Latvia for years, says that he's "not generally a fan of totalitarianism," but doesn't mind the probes. "Extraordinary times call for extraordinary measures."
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