EU Commissioner urges Latvia to do more to slash deficit

(BRUSSELS) - EU Economic Affairs Commissioner Joaquin Almunia urged Latvia on Thursday to do more to slash its ballooning budget deficit as the Baltic country struggles with a severe financial crisis.

"Sadly, the economic recession is proving more severe than expected in Latvia bringing hardship for many and increasing the deficit to higher levels than expected," Almunia said in a statement.

"Latvia needs to reduce the deficit in a sustainable way with significant budgetary and structural measures," he added.

"That's exactly our understanding of the situation. Now we're in discussions about the kind of measures and the amount of additional fiscal correction that is needed," Dombrovskis told reporters in Riga Thursday in reaction to Commissioner Almunia's comment.

"The (IMF) program is on track and still based on the stability of the lat and fiscal correction," he said.

The Latvian government has struggled to dispel recent talk that it may need to devalue the Latvian currency, especially after a debt auction on Wednesday failed to find a sufficient number of buyers.

On Thursday it succeeded in selling nearly 4 million euros of debt in a planned offer.

On Wednesday Dombrovskis said the crisis-hit country would adopt the euro in 2013 at the earliest and strongly ruled out a devaluation of the currency because of the likely social upheaval that would ensue.

A Baltic nation of 2.3 million, Latvia warned on Monday that its economy was set to contract by 18 percent this year -- the worst in the 27-member EU -- and overspending will soar to 9.2 percent of output, despite deep spending cuts.

This public deficit figure is nearly double the 5.0 percent agreed with international lenders.

Almunia said that a supplementary budget presented this week would mark "a first step" towards taking control of government debt and keeping the exchange rate peg to the euro, which is necessary for adopting the shared currency.

"I am looking forward to seeing additional steps adopted during the second reading of the budget, as announced by the government," he added.

The International Monetary Fund, the European Commission and big investors in the region such as Sweden already offered the government a 7.5 billion euro loan package in December.

An IMF official said last week that the deepening economic crisis in the country was forcing lenders to rethink the terms of the rescue after Latvia missed out on an instalment because it failed to satisfy lenders over its deficit.