Latvia Fails to Reach Agreement With Lenders on 2012 Budget

Latvia failed to reach an agreement with the European Commission and the International Monetary Fund, the providers of a bailout loan in 2008, over measures to trim next year’s budget deficit.

“We’re making some progress; it’s taking a bit more time than we’d hoped for,” Mark Griffiths, the IMF’s mission chief to Latvia, told a news conference in Riga late yesterday. The Baltic country is no longer in need of financing from the EU and IMF and sold Eurobonds in June.

The government, which is planning its last budget before the rescue program ends next month, is seeking to lower the 2012 deficit to 2.5 percent of gross domestic product so it can adopt the euro in 2014. Since 2008, Latvia has implemented tax increases and spending cuts of more than 16 percent of GDP to join the euro, a currency in which the majority of the country’s borrowers have taken out loans.

“All the evidence is that they will come to an agreement,” said Alf Vanags, director of the Baltic International Centre for Economic Policy Studies in Riga, by phone. “It would be very surprising” if they don’t come away with an agreement.

‘Right Number’

Finance Minister Andris Vilks yesterday said in an interview with Latvian Television that the size of measures needed may be about 100 million lati ($195.8 million).

“We are arguing on what the right number is; I think it can be more substantial than what some people believe,” Gabriele Giudice, the commission’s mission chief, said at the same event last night. “It’s a number that is not so much lower than the 150 million lati to 180 million lati” of the previous estimate the commission and the IMF made in April.

Eastern Europe may face a credit squeeze as western European banks mired in the euro-area debt crisis withdraw liquidity from the region, the IMF’s Managing Director Christine Lagarde warned in Moscow yesterday.

“If the storm strengthens further in the euro area, emerging Europe as its closest neighbor would be severely hit,” Lagarde said. “This time around, western parent banks, which have been instrumental in keeping those economies afloat, would no longer necessarily be here to sustain growth and the health of those countries.”

Bailout Loan

Latvia turned to a group led by the European Union and the IMF for a 7.5 billion-euro ($10.3 billion) loan three years ago after its second-biggest bank needed a state rescue and a debt- fueled property bubble burst. The Baltic nation’s economy may expand 2.5 percent next year, according to government estimates.

“Our understanding is that the top 20 percent earns 7 times the income of the bottom 20 percent,” said Griffiths, citing that as a need to protect the poor when budget cuts are made. The earnings ratio of the top quintile to the bottom 20 percent was the highest in the EU in 2009, according to Eurostat, the bloc’s statistics authority.

The government is considering ending state financing and having municipalities take responsibility for the guaranteed minimum income, which is 40 lati a month for adults, as a budget cutting measure. The government has ruled out tax increases as a budgetary measure.

“We are concerned about the GMI policy, we are not clear where that is. We feel very strongly that payments should be centralized,” said Griffiths. “Some of the poorer local governments will not be able to make those payments,”

Latvia’s registered unemployment rate fell to 11.6 percent in September from a peak of 17.3 percent in March 2010. The registered jobless rate in September was almost 20 percent in the poorer eastern region of Latgale compared with 8.6 percent in the region of the capital Riga.

Placing the financing of the benefit on municipalities “is very bad news for the poorest people of Latvia,” said Vanags. “They will be almost certainly get less and they will be subject to very severe investigations and I think for the sum of money that’s involved it’s not worth it.”

Prime Minister Valdis Dombrovskis told the news conference another round of negotiations will be held today or tomorrow. The parties held talks for 12 hours on Nov. 6, Finance Minister Andris Vilks said in televised comments yesterday.

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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