Latvian Parties Agree Budget, Euro as Coalition Talks Begin

Latvia’s ruling Unity party and former President Valdis Zatlers’s Reform Party said they agree on economic policy as talks begin to form a coalition to govern the Baltic nation after weekend elections.

Prime Minister Valdis Dombrovskis’s Unity and the Reform party together won the most votes in parliamentary elections Sept. 17, coming in third and second behind Harmony Center, which targets the country’s Russian-speaking minority. Parties linked to men Zatlers labeled “oligarchs” who may secretly control companies lost ground.

No party won a majority in the 100-seat house, which was dismissed after Zatlers called a referendum amid corruption allegations. As many as three of the five parties that made it to parliament need to form a coalition, with Unity and the former president’s party pledging to maintain fiscal consolidation and euro adoption, policies Harmony had opposed.

“There is an opportunity for a reform coalition,” Lars Christensen, chief emerging-market analyst at Danske Bank A/S, said yesterday by phone. “There is no immediate short-term risk given the outcome.”

Latvian five-year credit-default swaps, used to speculate on a borrower’s credit worthiness, rose to 260 basis points on Sept. 15, compared with 214.5 the day before parliament was dissolved, according to CMA Datavision prices.

Snap Ballot

Latvia’s snap ballot took place a year after the previous parliament was elected. Zatlers called the referendum that triggered it, the first in the country’s history, after the legislature refused to lift the immunity of a lawmaker facing a corruption probe.

Harmony, which has never been represented in government, won 31 seats, while Zatlers’s party gained 22 and Unity received 20, according to preliminary data. The nationalist National Alliance got 14 seats and the Union of Greens and Farmers finished last with 13.

Dombrovskis and Zatlers told journalists yesterday that their parties agree on cutting the budget deficit to 2.5 percent of gross domestic product next year and adopting the euro in 2014. Talks on forming a coalition will continue, they added, with Zatlers’s party planning to meet Harmony, which has advocated higher social spending.

Demands Softening

Harmony favors indexing pensions, which would add 25 million lati ($48 million) to the budget, said Nils Usakovs, the party’s candidate for prime minister, according to an interview today in the Dienas Bizness newspaper.

It has also previously said it wants to delay repayment of a 7.5 billion-euro ($10.4 billion) bailout loan from the International Monetary Fund, taken in 2008 after the government was forced to rescue the country’s second-biggest bank.

Still, Harmony may be softening demands to slow euro adoption. Latvia should seek to meet the entry criteria and put the final decision to a referendum in 2013, Riga-based Dienas Bizness quoted Usakovs as saying. It may also be willing to give up on a delay in repaying the country’s international loan and would support euro adoption in 2014 in exchange for pension indexation next year, Usakovs told the Baltic News Service, after meeting with the Unity party.

The best coalition would be Harmony, Reform and Unity, Usakovs told the newspaper. The three parties would have 73 seats, enough to change the constitution and enable direct presidential elections, which Zatlers favors.

“Harmony would be willing to sign off on just about anything to have a share of power and I think their voters will forgive them,” Nils Muiznieks, a political scientist at the University of Latvia, said today by phone. The choice of Harmony and or the National Alliance is “too close to call,” he added.

Financial Discipline

President Andris Berzins, who will nominate the next prime minister, favors a coalition that will continue austerity, he said in an e-mailed statement yesterday.

The next government should “successfully complete the international lending program and strengthen financial discipline in the country,” he wrote. Berzins will be away out of the country until Sept. 26, during which time the parties should negotiate among themselves over forming a coalition, he told Latvijas Radio Sept 14.

Harmony is vying to become the first Russian-oriented party to join government since Latvia regained independence from the Soviet Union in 1991. Having finished second in elections last year, it failed to agree on entering government after refusing to meet demands by Unity to admit Latvia had been occupied by the USSR following World War II.

While the Leta newswire reported Sept. 16 that that stance may have changed, citing a speech by Usakovs, it may still be omitted from government. In 2003, Estonia’s Center Party, which also appeals to that country’s Russian minority, came first in elections and was excluded from the cabinet.

Oligarchs Lose Out

Unity and Zatlers may turn to the National Alliance, whose economic policies are closer to their own. They won’t unite with the Union of Greens and Farmers, the party of Ventspils mayor Aivars Lembergs, one of the men Zatlers named as oligarchs. They deny the charges.

The Union’s representation fell from 22 in 2010, while the party of Ainars Slesers, another of the men, failed to reach the 5 percent threshold. Parties affiliated with the oligarchs won 51 seats at the 2006 election and 30 last year, their popularity plunging amid corruption allegations and a recession in 2009, the world’s deepest.

Latvia’s economy contracted by more than 25 percent between 2008 and 2010, unemployment quadrupled and wages fell. GDP expanded 5.6 percent in the second quarter, the quickest pace in 3 1/2 years, and unemployment has fallen from about 20 percent to 16 percent, according to a labor force survey.

“The question now is whether Latvia’s political leadership can devise a strategy that gets the economy back on track, stops massive population outflow and in broader terms offers a real vision for ensuring the durability of Latvia’s young democracy,” Christopher Walker, Director of Studies, at Freedom House, said yesterday by e-mail.

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

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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