The ink on the post below suggesting that I would wind down for Christmas (and exam preparation) has hardly dried before I am forced back into action (more or less that is).

And the occasion? 

Well, I am not going into too much background here, but one event important to remember (out of so many this year) was the announcement of the € 1.7 billion IMF stand-by-agreement for the Baltics. The bail-out plan itself is not so interesting in the sense that it has been on the drawing board for a some months, but the juicy part was the firm IMF position that the euro pegs should remain (and presumably that this means a future for Euro membership).

This surprised me since I have been relentlessly arguing that whatever kind of route the Baltics would take out of the current mess it would be one in which the pegs would need to be tweaked (or abandoned all together). Now, the surprise did not, obviously, spring from the fact that the IMF (1) chose to take a route other than the one I expected, but more so from the fact that I have always thought that the alternative in the form of a very painful deflationary correction wouldn't be plausible in a policy context. As such, my analysis of the Baltics have always been grounded in two related policy objectives. Given the size of the imbalances inherent in the economy as well the situation surrounding the foreign banks and their balance sheet exposure a deal would ultimately have to be struck which allowed the Baltics to regain competitiveness through the loosening of the pegs as well as measures to shore up the black hole which would be left in the balance sheets of foreign banks' subsidiaries operating in the Baltics.  By some strenuously confirming the pegs it seems to be me that the cure might just end up killing the patient which is another way to say that I wholeheartedly believe that the IMF's decision to solidify the pegs is a mistake. 

My colleague Edward Hugh thinks the same and in a recent whopper of a post (follow-up here) he argues why.