EU's Almunia in Latvia for bail-out talks

Oct 13, 2009, 8:50 GMT

   Riga - European Monetary Affairs Commissioner Joaquin Almunia arrived in the troubled Baltic state of Latvia Tuesday for a series of meetings to resolve wrangles over the country's adherence to a 7.5-billion-euro (11-billion dollar) aid package.

   Almunia was due to begin a lengthy series of meetings with Prime Minister Valdis Dombrovskis and his coalition partners, President Valdis Zatlers, and with representatives of the central bank.

   Latvia's bail-out package has been called into question by disputes in the government and with international lenders, including the European Union, International Monetary Fund (IMF) and World Bank, over the size of cuts needed in the 2010 state budget.

   The 2010 budget is due to be presented to the Latvian parliament by the end of the month.

   The EU and IMF insist Latvia must stick to commitments to slash 500 million lats (1 billion dollars) from the budget. Dombrovskis had suggested that smaller cuts could be made and still allow Latvia to remain within an agreed 8.5-per-cent-of-GDP budget deficit limit.

   Five hundred million lats were slashed from the 2009 budget in June. Measures included pay cuts of around a third for public sector workers, cuts in pensions and large-scale layoffs in the education sector - all of which the government argues are placing an unbearable strain on some of the weakest members of society.

   However, the government has remained split on whether to introduce a new property tax. The largest party within Dombrovskis' shaky coalition, the People's Party, has also backed the devaluation of the national currency, the lat.

   Both the property tax and the maintenance of the lat's currency peg to the euro are conditions of the agreements Latvia has signed with lenders.

   Failure to satisfy Almunia that Latvia is on track could lead to a cut-off of future loan payments, a move that could potentially cause a default and big losses to the Scandinavian banks that dominate the Latvian market.

   The picture was made more complex by the announcement on Tuesday night that former prime minister Andris Skele intends to make a political comeback.

   People's Party founder Skele is one of the richest individuals in the country and is on the record as a supporter of currency devaluation.