Euro Zone, Latvia Faces June Bankruptcy If IMF Loan Halted, Premier Says
March 9 (Bloomberg) -- Latvia faces bankruptcy in three months if it fails to
deliver budget cuts required by the International Monetary Fund and the next
installment of its bailout is delayed, Premier-designate Valdis Dombrovskis
said.
“If we do not continue to receive this international loan, then we go bankrupt
in June,” Dombrovskis, 37, said in an interview on March 6.
Latvia, in the grip of the severest crisis since independence in 1991, was
granted a 7.5 billion-euro ($9.5 billion) bailout last quarter after the
economy shrank 10.5 percent and the state seized its second biggest bank. The
government fell on Feb. 20 after agreeing to budget cuts needed to keep the
deficit below 5 percent of gross domestic product.
Dombrovskis wants the IMF to approve a deficit of 8 percent of GDP to avoid
crippling the economy. Latvia must cut the budget to meet terms of the bailout
or get a bigger loan from the IMF- led group and European Commission or it will
run out of money.
“It’s hardly possible” to keep to the earlier target, Dombrovskis said. “The
previous memorandum of understanding was signed under the assumption of a 5
percent recession, meanwhile the forecast is for 12 percent and it may get
worse.”
Latvia faces a deepening contraction as its currency peg to the euro forces it
to push through wage cuts to remain competitive. The economic collapse
threatens to spread through the whole Baltic region, and there may be need for
a broader bailout that includes Lithuania and Estonia, Dombrovskis said..
‘Domino Effect’
“In the Baltic region there is a fear of a domino effect, if one country would
go, then probably the whole region will go,” he said. Any plan “could talk
about all three countries, with a focus on Latvia as its weakest link.”
Last quarter, Estonia’s economy shrank an annual 9.4 percent, the most in at
least 15 years, while Lithuanian GDP contracted for the first time in nine
years, shrinking 2 percent.
Bankruptcy in Latvia would also affect Sweden, Dombrovskis said. Swedish banks
have claims in Latvia, Lithuania and Estoni worth about $75 billion, according
to ING Groep NV.
Standard & Poor’s cut Latvia’s credit rating to junk on Feb.. 24, lowering the
country to BB+ from BBB-. Credit-default swaps for Latvia soared to a record
1,109 basis points on March 3, the highest in the EU.
Dombrovskis’s five-party coalition, which may be confirmed by a parliamentary
vote this week, is planning to cut spending by 360 million lati ($642 million)
instead of the 700 million lati that would be necessary to keep the deficit
under 5 percent.
