Latvia pushing to change IMF bailout terms

(RIGA) - Crisis casualty Latvia is still trying to renegotiate the terms of an international package intended to rescue its rapidly-sinking economy, Prime Minister Valdis Dombrovskis said on Thursday.

Dombrovskis told reporters that Riga in particular wanted approval to use some of the funding earmarked for Latvia's banks to bridge the Baltic state's yawning budget deficit.

"Let me make something clear, we're not asking for any additional money," he said, explaining that the government simply wanted to shift some of the funds from the banking sector stabilisation pot in the total 7.5-billion-euro (10.2-billion-dollar) bailout.

Latvia secured the bailout from the International Monetary Fund, European Union and other lenders, including leading regional investor Sweden, in December as the country's economic crisis deepened.

Latvia, a former Soviet-ruled republic which joined the EU in 2004, had boasted double-digit economic growth in recent years but is now in the grip of the 27-nation bloc's sharpest recession.

Output in this country of 2.3 million people fell 4.6 percent in 2008 compared with the previous year. It is expected to drop by 16.5 percent this year on the same basis.

Under the terms of the bailout Latvia is meant to bring its deficit, the amount by which a country's spending exceeds its income over the year, below 5.0 percent of gross domestic product.

Riga, which missed out on an instalment of the bailout after failing to meet the target, has been pleading with lenders to allow a 7.0-percent deficit as it repeatedly tightens its belt, for example by slashing public-sector pay.

Dombrovskis, who has warned Latvia could face bankruptcy, said that the deficit was likely to drop to 5.0 percent in 2010 and 3.0 percent in 2011.

He said reining in the deficit was a tall order as Latvia lurches into a negative economic spiral in which government spending cuts accentuate the recession by further denting consumption.

"We will have to discuss with the international lenders how to deal with this spiral," Dombrovskis said, noting the increasingly grim forecasts.

The bailout was based on a now-outdated forecast for a 5.0-percent fall in output in 2009.

An IMF team is due in Latvia next week, and the lender's governing body is then due to decide whether to give Riga some leeway.

On Wednesday, Latvia's central bank said the government may have to cut the 2009 budget for a third time. If no further measures were taken, the deficit could balloon to 12 percent, central bank chief Ilmars Rimsevics warned.

Existing spending cuts have already sparked mass street protests, and the IMF acknowledged in a report last month that the government's room for manoeuvre was limited with local elections looming on June 6.