Embattled Latvian PM urges austerity drive support

(RIGA) - Embattled Latvian Prime Minister Valdis Dombrovskis Thursday urged lawmakers to maintain support for austerity measures in an international bailout, after he lost hold on parliament in a coalition revolt.

"The most important thing is parliament's majority support on those questions that secure the country's financial stability," Dombrovskis, 38, told reporters after a meeting with his remaining coalition partners.

"This is the key issue that will decide if the political insecurity which we have will result in financial insecurity and corresponding economic problems, or if we manage to avoid that scenario," he said.

The struggling Baltic nation of 2.2 million people was thrown into a new political crisis Wednesday after the largest force in Dombrovskis' centre-right coalition, the People's Party, quit the government.

The move came after repeated sparring within the five-member coalition formed only 12 months ago, and followed Dombrovskis' refusal to sign a deal with the People's Party on freezing tax hikes.

The walk-out leaves Dombrovskis' New Era movement and its allies with just 47 seats in Latvia's 100-member parliament.

That jeopardises his ability to keep up an austerity drive agreed under a 7.5-billion-euro (10.3-billion-dollar) rescue package put together at the end of 2008 by lenders including the International Monetary Fund and European Union.

Dombrovskis is trying to woo the centre-right opposition Latvia's First/Latvia's Way movement, which has 10 seats in parliament, in an attempt to recover a majority. It has said it will make a decision on Monday on whether to enter government.

"In the next few days, it'll be clear whether we'll gain a parliamentary majority or will continue work as a minority government," Dombrovskis said.

Latvian politics have remained unstable since the country won independence from the crumbling Soviet Union in 1991 -- Dombrovskis' government is its 15th.

The country has had four previous minority governments, none of which has lasted more than a year.

New Era leader Solvita Aboltina said the pressure was on.

"It is important first of all to convince international partners that this government has the capacity to work, that the (austerity) programme which we have started will continue in exactly the same manner," she said on Latvian television.

Latvia, which joined the EU in 2004, had enjoyed a reputation for spectacular growth before a boom driven by credit, rising wages and a real-estate bubble turned to bust in 2007.

With its economy expected to contract 4.0 percent this year after a jaw-dropping 18.0 percent in 2009, and with every fifth Latvian unemployed, parties are jockeying for position ahead of October's general election.

"The political instability is not expected to affect the IMF financial support plan since there is still some consensus among Latvian leaders," Danske Bank said in an analysis of the government crisis.

"But towards the election date we might expect opposition parties to come up with some new 'rescue plan', more favourable for the Latvian people but not in line with IMF demands," it said.