Latvia to slash budget by 10 pct: PM

(RIGA) - Latvia is set to slash its budget by 10 percent in a drive to meet the terms of an international bailout for the recession-hit Baltic state, the prime minister said Monday.

Valdis Dombrovskis said the government planned to slash 500 million lats (716 million euros, 1.0 billion dollars) -- equivalent to 10 percent of current spending plans -- after closed-door talks with President Valdis Zatlers.

A similar sum will have to be cut within the next two years as Latvia battles to bridge a yawning budget deficit, Dombrovskis told reporters.

The budget cuts, part of an ongoing round of anti-crisis belt-tightening, are likely to be passed by Latvia's 100-member parliament within days, house speaker Gundars Daudze told reporters.

"I think parliament will support it, because there's no other way," Daudze said.

Latvia, a country of 2.3 million people which broke free from the crumbling Soviet bloc in 1991, had enjoyed double-digit economic growth in recent years after joining the European Union in 2004.

But the economy went off the rails last year, and is expected to contract by 18 percent this year.

In December, Latvia won a 7.5-billion-euro (10.5-billion-dollar) bailout from lenders including the International Monetary Fund and the EU.

Under the terms of the rescue package Latvia has to do all it can to rein in its deficit -- the shortfall between state revenue and spending -- and has been paring public services and wages to the bone.

Last week, parliament approved a deficit equivalent to 9.2 percent of Latvia's gross domestic product, nearly double the 5.0 percent originally agreed with lenders.

Lawmakers are expected to pass the revised budget on June 17.

If Latvia fails to make the cuts, it could be forced to do without a tranche of more than 2.0 billion euros from the aid package, raising the spectre of bankruptcy.

In the face of the crisis, Riga has been battling mounting speculation that it could be forced to devalue the lat, which is pegged to the euro.

The Latvian central bank has been forced to dip into its coffers repeatedly to defend the peg, last week buying 168 million lats.

Central bank chief Ilmars Rimsevics warned against speculation over the lat and the country's ability to meet the bailout terms.

"There is no connection between receiving or not receiving aid and the lat's stability," he told reporters.