Latvia is close to ending a dispute with international donors including Sweden and the International Monetary Fund that jeopardized its bailout loan and raised devaluation speculation, the premier’s office said.
“Latvia is on the way to coming to an agreement with its international lenders,” said Liga Krapane, Prime Minister Valdis Dombrovskis’s spokeswoman. The premier in Helsinki today told reporters the country is “working on additional measures,” adding he expects an “intermediate conclusion” when European Union Monetary Affairs Commissioner Joaquin Almunia visits Riga on Oct. 13.
The IMF, European Union and Sweden, which agreed a 7.5 billion-euro ($11 billion) loan in December, have heightened the pitch of calls urging Dombrovskis to commit to budget cuts of 500 million lati ($1 billion) a year until 2012. Swedish Premier Fredrik Reinfeldt said on Oct. 5 Latvia “must correct” its deficit and Riksbank Governor Stefan Ingves has said the country may be left “in the cold” if it doesn’t comply.
“The message has been heard,” said Nils Muiznieks, a political scientist at the University of Latvia, by phone yesterday. “The chances of coming to an agreement have improved massively” after Swedish admonishments.
Finance Minister Einars Repse has had meetings with officials from the Nordic states, EU members, the IMF, the World Bank and the U.S. Treasury, and “everyone was in agreement that Latvia has to work according to the program,” he told Latvian Independent Television last night.
Repse added the government must find places to cut expenditure and may have to introduce a real-estate tax to meet the terms of the loan.
Sweden’s banks are the biggest in the Baltic states. Stockholm-based Swedbank AB, the region’s biggest lender, rose 4.5 percent to 63.50 kronor in Stockholm. SEB AB rose 1.1 percent to 45.2 kronor. The krona gained as much as 0.5 percent against the euro, was trading at 10.3113 ending two days of losses.
The yield on Latvia’s 5.5 percent government bond due March 2018 dropped 4 basis points today to 6.94 percent. The OMX Riga stock index closed 0.4 percent higher after plunging 3.1 percent yesterday. The lats was little changed at 0.7095 per euro.
Sweden’s debt office said in March that it would lend Latvia about 720 million euros, as part of the international loan, next year. The country currently has the rotating presidency of the European Union.
The Baltic region, part of the Soviet Union until 1991, is enduring the severest recession in the EU; Latvia’s output slumped 18.7 percent in the second quarter, Lithuania plunged 20.2 percent and Estonia’s economy contracted 16.1 percent. The three will face “depressive economic forces” through next year, SEB said in an Oct. 7 report.
Donors have questioned the commitment of Latvia to fulfilling the terms of its loan after a report revealed some of the promised cuts weren’t implemented. Latvian public wages have fallen about 5 percent in the first half of the year, compared with a targeted 35 percent agreed, the IMF said in an Oct. 2 report. The Washington-based fund also said that a reliance on “one-off” measures to cut the budget deficit threatens to delay the euro adoption strategy.
Latvia, which like Lithuania and Estonia pegs its currency to the euro, has tried to persuade donors it can achieve an agreed 8.5 percent deficit of gross domestic product next year by cutting its budget by 325 million lati, 175 million lati less than the lenders say is necessary. Lawmakers have also balked at donor recommendations to introduce a real-estate tax.
The Finance Ministry is now preparing additional measures to find the 175 million lati in budget cuts, spokesman Aleksis Jarockis told the Baltic News Service today no telecheck payday loans.
The government has “basically agreed to prepare additional measures to reach the size of the fiscal consolidation which would satisfy the international loan providers,” Dombrovskis told the British Broadcasting Corp. today.
“Most likely they will reach an agreement somewhere in between” 325 million and 500 million, said Martins Kazaks, chief economist of Swedbank’s Latvian unit. Lawmakers have until November to reach an agreement on the size of the cuts.
“If Latvia does not cut, then they will have to make expenditure cuts three times those now” if loans are suspended, he said. “If you have the option of losing a finger compared to a whole arm, then go for the finger.”
Lawmakers in Riga, mindful of elections in a year, have decried the bailout terms and Dombrovskis is struggling to soften the blow for households. His efforts have thrown oil on the flames of speculation that Latvia may be forced to devalue the lats.
The premier on Oct. 6 asked civil servants to look into the feasibility of capping mortgage holders’ liabilities to the value of the collateral offered against their loans. That was interpreted by some investors as a sign the government is paving the way for a devaluation by limiting the domestic losses such a move would incur.
The central bank in an Oct. 7 statement questioned the timing, arguing such legislation “should have been adopted earlier, for purposes of slowing down lending, or it should be postponed: this is the most inappropriate moment possible.”
A devaluation would hit corporate loans and bring with it a “wave of insolvencies,” according to Commerzbank AG currency strategists Lutz Karpowitz and Antje Praefcke, who say the mortgage proposal is no prelude to a controlled devaluation.
The banks have signaled they may rethink their commitment to the country if the proposed legislation were to pass.
‘Limits for Everything’
“You always have to evaluate the conditions within which you operate, but Latvia is one of our four home markets and we have no other intentions than to keep it as one of our home markets,” Swedbank spokesman Thomas Backteman said by telephone today. “But there are of course limits for everything, including our presence in individual countries, if the legal system or other things change radically and make it impossible to operate there.”
This isn’t the first time Latvia has stared down the tunnel of ruin. Lawmakers in June struck an 11th hour agreement on budget cuts to satisfy lenders and ensure the flow of payments. That agreement was pushed back until after municipal and European parliament elections.
The difference now, is Latvia is no longer in danger of running out of money after 1.6 billion euros from the EU, IMF and World Bank was transferred, enough to last at least until March, said Annika Lindblad, an analyst with Nordea AB.
Political efforts to contain the fallout of the recession come as households handle wage cuts that make loan repayment impossible and slumping property values. House prices fell 71 percent in June from a peak in March 2007, according to real- estate broker Latio.
More than half of Latvian mortgages issued by Swedbank exceeded the value of their collateral at the end of the second quarter, Jenny Clevstrom, a bank spokeswoman in Stockholm, said on July 24.