Latvia to seek EU, IMF economic crisis aid

(RIGA) - Latvia is to launch formal talks with the EU and IMF on financial aid to cushion the Baltic nation from its deepening economic crisis, Prime Minister Ivars Godmanis said Thursday.

Godmanis told reporters that the goal of talking to the European Commission and the International Monetary Fund would be to "stabilise the financial system" but declined to say when official negotiations could kick off.

The amount of financial assistance needed will be determined during the talks, Godmanis said following a cabinet meeting.

"It will depend on how the international organisations evaluate our situation," he said.

Godmanis said that "processes connected with a certain bank" would be included in the discussions but did not elaborate.

On November 8, the government bought 51 percent of Parex -- Latvia's largest local bank and the country's second-biggest after Swedish-owned Swedbank -- for the symbolic sum of two lats (2.85 euros, 3.65 dollars).

The move came after the bank lost 108 million lats in deposits. Parex's boss blamed an exodus of customers attracted by Swedish state guarantees for Nordic rivals such as Swedbank and SEB, the country's third-ranked bank.

The government said it had acted to ward off a wider financial sector crisis in the Baltic state, which is in the grip of recession.

On November 14, Finance Minister Atis Slakteris said that Riga had put out feelers to the European Commission -- the executive body of the 27-nation European Union, which Latvia joined in 2004.

"Before the government took over Parex Bank, it was clear that we did not need support. At this moment, of course, we are considering financing possibilities and the European Commission is one of the most powerful financial instruments available to us," Slakteris said last week.

Unofficial talks with the IMF have also begun, a source close to Godmanis told AFP.

The IMF takes a harder line on Latvia's economic situation than the government and disagreements on that front will have to be ironed out during negotiations, the source said.

International credit agencies have been slashing Latvia's ratings.

Latvia, which broke free from the crumbling Soviet Union in 1991, has enjoyed a reputation as an economic "tiger," notably since joining the EU.

But after several years of double-digit growth, the country of 2.3 million people is now grappling with a recession as once-robust domestic demand slumps in the face of high inflation, tighter domestic credit rules and the global economic crisis.

The Latvian economy shrank 4.2 percent in the third quarter compared with the same period in 2007 and official data show the country is suffering the sharpest recession in the EU.

The Latvian central bank expects the economy to shrink 1.5-1.7 percent this year and 3.5-3.9 percent in 2009.

Several other emerging economies in Europe, including EU member Hungary and non-members Ukraine, Belarus and Serbia have also sought international aid as the global credit crunch threatens the banking industry and markets slump.