Latvia starves off bankruptcy

June 12, 2009

, RIGA, June 12 – Recession casualty Latvia has staved off bankruptcy by making swingeing new cuts in public spending, Prime Minister Valdis Dombrovskis said Friday.

"With yesterday\’s decisions the state has really been saved from bankruptcy," Dombrovskis said on Latvian radio after a late-night cabinet session.

The government, which is desperately trying to bridge a yawning budget deficit, decided late Thursday to slash public-sector pay by 20 percent and pensions by 10 percent, and not to raise taxes.

Dombrovskis said the government would try to speed up the process of final adoption of the latest belt-tightening measures, with a vote in parliament possible as early as Monday.

After a previous round of cuts failed to stem the crisis, Dombrovskis\’ embattled five-party coalition scrambled to beef up the austerity package in order to fulfill the terms of a bailout steered by the International Monetary Fund.

Without such steps, Latvia faces missing out on a new tranche of the 7.5-billion-euro (10.5-billion-dollar) rescue package agreed in December by the IMF and other lenders including the European Union.

Under the terms of the bailout Latvia has to do all it can to rein in its deficit — the shortfall between state revenue and spending.

Last week, parliament approved a deficit equivalent to 9.2 percent of Latvia\’s gross domestic product, nearly double the 5.0 percent originally agreed with lenders. Dombrovskis did not say what impact the latest cuts would have on the figure.

Dombrovskis — who came to power in March after a previous government collapsed amid the economic crisis, street unrest and in intra-coalition rebellion — had warned that Latvia\’s coffers could be empty within weeks.

"Apparently we have avoided the worst case scenario," he said Friday at a meeting of the Baltic Economic Forum, a business and political gathering focused on Latvia and its neighbours Estonia and Lithuania, which are also in crisis.

Latvia, a country of 2.3 million people which broke free from the crumbling Soviet bloc in 1991, enjoyed breakneck economic growth in recent years after joining the European Union in 2004.

But the economy went off the rails last year as rampant inflation and a bursting credit bubble were compounded when the global economic crisis hit its major trading partners in Western Europe and Russia.

The Latvian economy is expected to contract by 18 percent this year.

The government is fending off mounting speculation that it may be forced to devalue the national currency, the lat, which is pegged to the euro.

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