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How the Baltics melted down

The "three D's" could spell out a worst-case scenario for Estonia, Latvia and Lithuania.

A woman looks at riot police during clashes in front of Lithuania's Parliament in Vilnius, Jan. 16, 2009. Lithuanian police used tear gas, dogs and rubber bullets to push back a crowd from the Baltic state's parliament, after people threw stones and bottles at the building during a rowdy anti-government protest. (Ints Kalnins/Reuters)

RIGA, Latvia and VILNIUS, Lithuania — In the Baltics, the specter of three “D’s” are stalking the land: devaluation, default and destabilization.

Eastern Europe is in economic turmoil. Among the countries where the bite has been the largest are the three former communist states of Estonia, Latvia and Lithuania, which joined the European Union and NATO in 2004. Just a few years ago, they registered some of Europe’s highest growth figures, earning the moniker the “Baltic Tigers.” Now they are again setting new records — but this time in the loss column.

The causes of the implosion are many and include a confluence of external and internal factors. EU membership opened up the Baltics' markets to foreign investment and banks, while providing them outlets to export to. When the going was good, banks lent readily, governments ran huge deficits and a number of economic bubbles emerged — most prominently in the real estate, retail and construction sectors. Even at the height of the boom, analysts were warning that the growth was unsustainable. Now, however, with the global downturn, external markets have disappeared, while banks ­— a large number being local affiliates of Scandinavian ones — have cut off credit lines.

“Money was available, credit was cheap and people thought that the honeymoon would go on forever,” said Kestutis Sadauskas, the EU’s representation head in Lithuania. “The market was totally unsaturated.”

“The money went into business, but often not into the right ones. There was no value added,” he continued.

Latvia’s economy will contract this year by a heart-stopping 12 percent, says the country’s finance ministry — the largest potential drop in the 27-member EU. Others say it could be even more. Paul Krugman, the American Nobel Prize economist and New York Times columnist, called Latvia “the new Argentina” in a December online discussion.

Estonia is better placed economically to weather the storm, analysts say, having socked away financial reserves during the fat years. Nevertheless, its gross domestic product may shrink between 5 and 9 percent, while unemployment will rise considerably. Lithuania’s economic figures will drop somewhere between those of Latvia and Estonia.

Throughout the Baltics, the gloom is manifest. Nearly all of the region’s seven million inhabitants seem to have been affected by the crisis one way or another — either directly through a job loss or salary reduction, or something similar within their immediate circle. In Riga, empty shop fronts dot the main streets, their dirty, grey windows with “For Rent” signs gaping into the darkened streets.