Solvita Āboltiņa, chairman of the New Era party, said the budget would be revised with further cuts to be announced next week.
RIGA — Latvia’s political leadership, feeling the intense international pressure, has hinted that it would comply with obligations to major lenders such as the IMF and the EU and cut next year’s budget deficit by 500 million lati (€700 million).
After meeting with President Valdis Zatlers late Wednesday, parliamentary leaders of the center-right ruling coalition said they were prepared to make further amendments to next year’s budget deficit in order to satisfy international lenders.
Solvita Āboltiņa, chairman of the New Era party, told the LETA news agency that the deficit had to be reduced in accordance with lenders’ demands and that the exact size of the reductions would be announced next week. Party leaders agreed that the government would agree on the combination of cuts and tax increases at an extraordinary session Saturday and that the proposals would be sent to Parliament immediately for approval next week.
The consensus came as international pressure mounted on Latvia and speculation of an imminent devaluation of the currency began anew. The Bank of Latvia issued a statement calling on the government to clarify the 2010 budget and avoid a repeat of June, when international confidence in Latvia plummeted. “Another wave of distrust is beginning to roll over Latvia, one which will potentially bring higher interest rates and worse conditions for business,” the bank said in a statement.
Prime Minister Valdis Dombrovskis had been hoping to convince lenders to use an 8.5 percent deficit as the overriding guideline for the 2010 budget— a parameter Latvia could achieve but cutting the deficit by 325 million lati, Dombrovskis argued – but officials from the International Monetary Fund, European Union and Sweden are insisting that Latvia use the 500 million lati benchmark. Dombrovskis argued that consolidating the additional 175 million lati, either by slashing expenditures or raising taxes, would essentially bury Latvia’s already battered economy and postpone any revival indefinitely.
International lenders, however, are not interested and want Latvia to fulfill the agreement it inked last summer that clearly spells out a deficit reduction target of 500 million lati. Swedish Finance Minister Anders Borg was particularly vocal, reminding Latvia on Tuesday that lenders’ patience with Latvia was wearing thin.
Feeling unduly pressured, Dombrovskis then increased the stakes by calling for legislation that would limit banks to collecting only the collateral on defaulted mortgage loans, a move that would deal a huge blow to Swedish-Scandinavian banks such as Swedbank, SEB, and Nordea.
Sweden’s central bank kept up the pressure, as its chairman, Stefan Ingves called on the Baltic state to honor its commitments. “It is as though we are living in a completely different world,” Ingves told the Dagens Nyheter daily paper in an interview published Thursday, according to Reuters. He said Latvia couldn’t simply change the terms of an agreement as it felt.
The uncertainty surrounding Latvia had an impact on currency trading, with the Swedish krona falling against the euro in Wednesday trading, according to The Wall Street Journal.
Closer to home, a weekly auction of 8 million lati worth of treasury bills, with a maturity in April next year, in Latvia failed to attract buyers.
