June 16 (Bloomberg) -- Latvia’s lawmakers will approve cuts in government spending as early as today, enabling bailout payments to resume and allaying concern about a currency devaluation.

The Riga-based parliament is poised to vote on cuts of $1 billion, equal to 10 percent of budget spending, in an effort to unlock a 1.7 billion-euro ($2.4 billion) tranche from a group led by the European Commission and the International Monetary Fund. The funds will probably be transferred at the end of June or in early July, Prime Minister Valdis Dombrovskis has said.

Latvia, the European Union’s fastest growing economy in 2006, is suffering the bloc’s severest recession and relying on a 7.5 billion-euro international bailout to avoid bankruptcy. The loan’s terms assume Latvia will keep its euro peg and curtail the budget deficit, exacerbating the slump.

“The government gets to buy some time” with the loan, said Martins Kazaks, chief economist at Swedbank AB’s Latvian unit. “It seems they will do what is necessary.”

Lawmakers will vote on measures including 10 percent pension reductions and 20 percent state pay cuts, with the proposal also entailing the closure of some state agencies and advisory councils for state-owned companies.

“We are preparing for a late night,” said Lelde Rafelde, a spokeswoman for the parliament, in a telephone interview. Parliament will begin an extraordinary session, in which 16 bills will be discussed starting at about 3 p.m. local time. After that, lawmakers will return to a standard session to look at legislation including the budget amendments, she said.

‘Same Equation’

The cuts are “more than enough” and “huge,” Dombrovskis said in a June 10 interview. Latvia has received “positive indications” from the Commission and the IMF that the measures would release the next loan tranche, he said.

The government, which took office in March after street protests led to the ouster of the previous administration, also will reduce spending by 500 million lati next year and in 2011 to bring the deficit within 3 percent of gross domestic product, enabling euro adoption.

“Hopefully they will immediately start working on next year’s budget” or it’s “back to the same equation” of last- minute cuts, Kazaks said. “It’s not going to be over” with the latest reductions.

Latvia’s plight and the prospect of a devaluation, sparked by concern that policy makers wouldn’t push through deep enough cuts to keep bailout funds flowing, has roiled markets at home and abroad. Sweden’s krona has suffered most because the country’s banks are Latvia’s biggest.

Restoring Confidence

The krona is the worst performer this month of the 16 major currencies tracked by Bloomberg against the euro, having lost 3.2 percent.

Shares of Stockholm-based Swedbank AB, the biggest lender in the Baltic states, slumped 16 percent and SEB AB dropped 11 percent on June 3 after a 50 million-lati ($98.5 million) Treasury bill auction failed.

Latvia’s overnight lending rate soared to 24.6 percent on June 12 from 5.8 percent a month earlier after the central bank’s 11 consecutive weeks of buying lati to support the currency drained the market.

Government promises to adhere to Commission and IMF loan terms helped restore confidence in Latvia’s finances.

The Treasury sold about 30 million lati in bills last week in two auctions and the central bank sold 111.7 million lati last week after the currency strengthened for the first week since November.

‘Life Support’

The current-account deficit, the EU’s biggest in 2007 at 22.5 percent of GDP, turned into a surplus in the first quarter of 0.1 percent of GDP, preliminary data show. The surplus widened to 87.3 million lati in April, compared with a total surplus of 2.6 million lati in the first three months.

Still, Latvia’s economy is on “life support,” potentially leading to a lats devaluation that may serve as a “wake-up call” alerting investors to vulnerabilities in central and eastern Europe, Nouriel Roubini, a New York University economics professor, said on June 10.

The Commission has said it will continue its financing program, which will “give assurances to the market that the present peg of the lats will continue, will be maintained, will be reinforced,” Monetary Affairs Commissioner Joaquin Almunia said on June 5.

European Central Bank President Jean-Claude Trichet the same day said he had “full confidence” the government will take “appropriate decisions that are needed on a domestic basis without any change in the currency.” Trichet also said the ECB had a repo agreement with Latvia’s central bank.

Fundamental Change?

Domestically, spending cuts may stir opposition, even after the five parties in Dombrovskis’s ruling coalition, along with employers’ organizations and labor unions, accepted them.

The Latvian Free Trade Union Confederation on June 18 plans a demonstration demanding the next 500 million lati in cuts don’t hit “low income” citizens, according to a statement on its Web site.

Latvia is scheduled to receive 200 million euros from the IMF this quarter, 1.2 billion euros from the EC and 300 million euros from others that contributed to the loan.

“There really hasn’t been any fundamental change,” said Lars Christensen, head of emerging markets at Danske Bank A/S in Copenhagen. “The only thing that has changed is how long they can postpone a devaluation. The issues are still there, and what will happen when they need the next loan installment?”

Latvia’s central bank defends a 1 percent band around a midpoint to the euro through purchases and sales of the currency.

To contact the reporter on this story: Aaron Eglitis in Riga, Lia, at aeglitis@bloomberg.net

Last Updated: June 16, 2009 08:52 EDT