EU tells Latvia correct deficit by 2012

(BRUSSELS) - The European Commission called on Latvia on Thursday to cut its huge budget deficit to an EU limit by 2012 as it approved a desperately needed instalment of loans to the crisis-stricken country.

Riga expects the shortfall between public revenues and spending to hit 11.6 percent of gross domestic product this year, with the Latvian economy estimated to contract by 18 percent.

However, the European Union's executive arm told the government to keep its budget deficit to 10 percent of gross domestic product this year and ensure that the hole in the public finances be reduced to an EU limit of 3.0 percent by 2012.

The government in Riga has recently made repeated, massive budget cuts as it scrambles to meet the terms of an international rescue package of loans and receive the instalment it needs to ward off default and a currency crisis.

It has been forced to cut most public sector salaries by 20 percent and pensions by 10 percent along with a raft of other cuts in order to meet the terms of the international bailout.

The Commission said that the EU would go ahead with a second instalment of 1.2 billion euros in loans from the bloc this month that had been suspended over concerns about Riga's commitment to budgetary austerity.

"Latvia is going through a very painful adjustment, but the EU is providing considerable support with a balance of payments loan," said Economic and Monetary Affairs Commissioner Joaquin Almunia in a statement.

"The correction of the large budgetary and macro-economic imbalances will put the country on the road to the euro and to sustainable growth conducive to employment creation," he added.

In December, Latvia obtained a 7.5-billion-euro bailout from the IMF, European Union and other lenders. Of that total the EU is to provide up to 3.1 billion euros and has already handed out the first billion.

Commission recommends 2012 for correction of Latvia's 
excessive deficit - briefing