EU sees Latvian budget cuts paving way for loans

(LUXEMBOURG) - Latvia should receive a desperately needed tranche of international bailout loans in the coming weeks if Riga pushes ahead with promised austerity budget cuts, a top EU economic official said Tuesday.

Latvia vowed on Monday to slash its budget by 10 percent in a drive to meet the terms of a stalled EU and IMF bailout package which the recession-hit Baltic state needs to avert an economic meltdown.

EU Economic and Monetary Affairs Commissioner Joaquin Almunia said that the measures would be sufficient for a second tranche of the loans to be released at the end of June or in early July.

"I am confident that we will have a successful end to this difficult process of negotiation, that the supplementary budget will be adopted with the adequate reforms and that in this case our financial support will continue," he said.

Almunia told journalists after a meeting with EU finance ministers in Luxembourg that he and European Commission chief Jose Manuel Barroso would discuss the measures with Latvian Prime Minister Valdis Dombrovskis on Wednesday in Brussels.

"I am sure that the prime minister of Latvia, the finance minister of Latvia and the other political leaders are fully aware of what is at stake," he said.

In December, Latvia won a 7.5-billion-euro (10.5-billion-dollar) bailout from lenders including the International Monetary Fund (IMF) and the European Union, with its economy expected to contract a huge 18 percent this year.

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 promised cuts, it could be forced to do without a tranche of more than 2.0 billion euros from the international loan package, raising the spectre of debt default and economic meltdown.

Riga has been battling mounting speculation that the crisis could force it to devalue its currency, the lat, which is pegged to the euro.