Latvia must reform or risk losing bailout cash: EU

(RIGA) - Crisis-hit Latvia risks losing the next tranche of an IMF-led loan should it fail to adopt deep structural reforms, the EU's top monetary official said Wednesday in Riga.

"If we consider that the necessary reforms are not adopted or for whatever reason the supplementary budget adoption is postponed, we will have very, very strong difficulties in producing the second installment," Joaquin Almunia, EU Commissioner for Economic and Monetary Affairs told reporters.

He spoke following talks with government officials and Latvia's central bank chief.

Forecast to suffer the deepest recession in the 27-nation bloc this year, Latvia secured a 7.5 billion euro (10.2 billion dollar) loan in a bailout led by the International Monetary Fund (IMF) in December 2008 after Riga was forced to nationalise the largest domestic lender, Parex.

The latest part of that loan due for payment is worth 1.7 billion euros.

Amid rising public discontent over severe budget cuts, the new centre-right government of Prime Minister Valdis Dombrovskis has been struggling to drive down its deficit as part of the hefty bailout agreement with the IMF, the EU and Nordic countries.

The Dombrovskis team, which is drafting the 2009 budget from scratch, is however asking its creditors to allow the 2009 deficit to rise to seven percent of GDP, above the agreed level of five percent.

"When our experts will come here in the coming weeks to analyse the budget, then we can give to you our opinion if it's possible or not," Almunia said.

Latvia has already received some 1.6 billion euros of the bailout but in March it missed out on a 200 million euro tranche from the IMF which said Riga had failed to make deep enough budget cuts.

The next 1.7 billion euro installment of the hefty loan is slated for the end of June or the beginning of July, Almunia said.

Riga has already slashed public spending -- including public sector pay, which sparked mass street protests -- and is trying to make even deeper cuts.

Latvian officials have warned that even the 40 percent budget cut on the horizon will not enable Riga to stay below the deficit target of 5.0 percent of GDP.

The government is expected to submit the 2009 amended budget later this month while parliament is due to vote on it in a first reading before the June 6 local and the European Parliamentary elections.

As part of the painful structural reforms, government plans to close some hospitals and schools have prompted student and teacher protests in the past two months.

Experts also warn that an excessive budget deficit could derail Latvia's plans to join the eurozone in 2012.

Along with fellow ex-Soviet Baltic republics Estonia and Lithuania, Latvia joined NATO and the European Union in 2004 after which it enjoyed record economic growth fuelled by easy credit and robust domestic demand.

Hit hard by the global economic crisis, its GDP could shrink by 13.1 percent percent this year, according to the latest EU forecast.