Lithuanians to Oust Government as Austerity Fuels Exodus

Lithuanians are set to oust their government after austerity measures intensified the Baltic nation’s deepest recession, sending unemployment and inequality to record highs and prompting an exodus of workers.

Voters go to the polls Oct. 14, with the opposition Social Democrats likely to lead a new coalition, a survey by Baltijos Tyrimai shows. A Cabinet will be formed after a second round of balloting on Oct. 28 in the single-mandate districts that comprise half of the 141-seat parliament. Prime Minister Andrius Kubilius’s Homeland Union-Christian Democrats poll third.

Kubilius cut wages and raised taxes equivalent to 12 percent of economic output in 2009 and 2010 amid the European Union’s second-worst recession. While voters may be lured by pledges to boost wages and trim sales levies, the state of public finances and the breadth of the new coalition will block deviation from Kubilius’s fiscal discipline, according to Oxford University’s Ainius Lasas.

“The left-of-center parties won’t go through with their rather populist promises, for objective reasons and because they won’t have enough power to make it happen,” Lasas, a senior research fellow focusing on media and democracy in central and eastern Europe, said Oct. 10 by phone. “It will all be blamed on the coalition.”

Austerity Backlash

Kubilius is trying to avoid the fate of European leaders who lost power in a wave of protests against austerity measures that contributed to recessions in economies from Romania to Spain instead of tackling the euro area’s debt crisis as envisaged.

His government is seeking to narrow this year’s budget deficit to close to the EU’s 3 percent of GDP limit from 9.4 percent in 2009, plans that have helped push borrowing costs to record lows.

Lithuania’s dollar bond due 2022 traded at 3.598 percent at 11:48 a.m. in Vilnius, near the lowest since it was sold in January. The cost of insuring state debt against non-payment for five years using credit-default swaps was 155 basis points, compared with 845 points in February 2009, according to data compiled by Bloomberg.

The benchmark OMX Vilnius stock index, which has gained 17.1 percent in 2012, rose 0.1 percent from yesterday to 349.74, close to this year’s high of 351.31, where it closed Aug. 10.

‘Fantasy’ Promises

“Promises by the left-leaning parties to raise pensions and so on are from the realm of fantasy and may just be forgotten,” Violeta Klyviene, an economist with Danske Bank A/S in the capital, Vilnius, said Oct. 10 by phone. “Rising borrowing costs would serve as a cold shower for these politicians, simply forcing them to stick to discipline.”

The Social Democrats have 24 percent support, compared with 18 percent for Russian-born entrepreneur Viktor Uspaskich’s Labor Party, 12 percent for Homeland Union, 8 percent for the Liberal Movement, part of the current coalition, and 7 percent for impeached ex-President Rolandas Paksas’s Order & Justice, according to a Sept. 16-28 poll by Baltijos Tyrimai for the ELTA news service.

Two more parties, the Lithuanian Polish Election Action and the Way of Courage, have 4.7 percent and 4.5 percent backing, just below the 5 percent parliamentary threshold, according to the survey of 585 people, whose margin of error was 4.1 percentage points.

Twenty-three percent of registered voters, who will also participate in a non-binding referendum on building a nuclear- power plant backed by Kubilius, were undecided.

Unemployment, Emigration

While Lithuania’s gross domestic product will advance 2.5 percent this year and 3 percent in 2013, according to the Finance Ministry, output plunged almost a quarter as Kubilius implemented austerity during the recession.

As the $43 billion economy has expanded, unemployment has fallen from a peak of 18.3 percent in the second quarter of 2010. Still, it remains above 13 percent, driving emigration to countries such as Norway and the U.K.

As a result, Lithuania’s population dropped below 3 million for the first time in April, compared with 3.7 million in 1990. About 53,900 Lithuanians left the country in 2011, while 15,700 returned, the statistics office said in March.

Spending cuts and tax increases since 2008 have also pushed inequality to the highest level in the EU, with the proportion of people at risk of poverty surging to the biggest among the bloc’s 27 members, according to Eurostat.

Jobs, Taxes

The Social Democrats, who advocate euro adoption a year later than Kubilius’s 2014 goal, have pledged to create jobs and adjust income-tax rates to benefit those who earn least. The Labor Party says it will raise the minimum wage to 1,509 litai ($563) a month from 800 litai and reduce the value-added tax on basic food stuffs.

These plans contradict promises by both parties to maintain control of fiscal affairs, Kubilius has said. President Dalia Grybauskaite, a former EU Budget Commissioner who must name Lithuania’s new premier after the elections, has criticized some parties’ spending pledges, urging fiscal responsibility.

Investors would only fret if the elections yield a government that differs from those seen since independence from the Soviet Union in 1990, according to Tomas Andrejauskas, head of Swedbank AB (SWEDA)’s markets unit in Lithuania.

‘Expects Stability’

“Everyone expects stability, a coalition like we have now, no big changes,” he said Oct. 8 by phone from Vilnius. “If somehow the traditional parties lose in a big way -- the conservatives who are in power now, the Social Democrats -- then the markets might be uneasy.”

The new coalition will probably have to include Homeland Union or the Liberal Movement, which engineered the austerity policies of the last four years, according to Oxford University’s Lasas.

Algirdas Butkevicius, leader of the Social Democrats, has vowed to maintain fiscal discipline as Lithuania gears up to assume the EU’s rotating presidency for the first time next July.

“There will be no revolutions in the budget,” Butkevicius said in a Sept. 18 interview in Vilnius. “Lithuania won’t follow the same path Greece, Italy or Portugal did.”

To contact the reporter on this story: Bryan Bradley in Vilnius at bbradley13@bloomberg.net

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

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