Latvia reaches loan agreement with IMF

Latvia's ruling coalition parties agreed in principle yesterday to a deal with the IMF on 500 million lats (Dh3.67bn) of 2010 budget cuts despite political discontent that had threatened to derail a vital loan programme.

Latvia is relying on a €7.5bn (Dh39bn) rescue agreed with the International Monetary Fund (IMF) and European Union last year to avoid devaluation and plug its budget deficit. But some of the five ruling parties have been uneasy about the price.

"I am satisfied that the coalition parties have looked at this question, which is vital to Latvia, with great political responsibility," Prime Minister Valdis Dombrovskis said after the coalition backed the IMF deal.

The parties are due formally to sign the agreement today. It will then be considered by the board of the IMF, which will decide on further loans to Latvia.

Precise details of what was in the document were not released, though the government said it was similar to one reached with the EU.

Latvia, which has its lat currency fixed to the euro, is one of the smallest EU nations, but its woes have caused jitters in Sweden, whose banks, particularly Swedbank and SEB, are making losses due to the recession-hit economies of the Baltic states.

Eastern European markets have also been nervous as investors fear a devaluation in Latvia would cause others with currency pegs – Lithuania, Estonia and Bulgaria – to devalue, too.

Latvia hopes the agreement between the ruling coalition parties will help unlock €200 million of IMF funding and make it easier for Latvia to raise funds from other lenders.

Dombrovskis has said the IMF money is not so important, as Latvia is due next week to get €1.2bn from the EU, but that the IMF's mark of approval for the programme is vital to keep other lenders on board. Other lenders in the programme, designed to run from 2009-2011, include the World Bank, Sweden, Denmark, Poland, the Czech Republic and Estonia.

The tough talks with the Fund led to rising political tensions, and last week an official in the second-largest ruling party questioned whether an agreement was necessary at any price and that maybe the talks should be put on hold.

Dombrovskis told a news conference with President Valdis Zatlers, who cut short a vacation to Italy to be on hand in Riga due to the political tensions, said the deal with the Fund included fairly general conditions.

He said the government now had to work according to a previously agreed schedule of drawing up the 2010 budget, where concrete cuts would be discussed in the second half of August. He said no further pension cuts would be made after a 10 percent reduction this year caused wide controversy, and that taxes would only be raised if the government could not find other ways to make cuts or find revenues.

Latvia's economy plunged into deep recession after the global financial crisis began, following a spurt of rapid growth during the credit boom. Gross domestic product is expected to contract by 18 per cent this year.

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