By Aaron Eglitis
Latvia will receive a 7.5 billion- euro ($10.4 billion) loan from a group led by the International Monetary Fund and the European Union to help bolster the country’s economy and banking system roiled by the global financial crisis.
The financial assistance package will cover the period up to the beginning of 2011, the European Commission said in an e- mailed statement today. The IMF will provide 1.7 billion euros, the Nordic countries will together give 1.8 billion euros and the European Union will supply as much as 3.1 billion euros, with the balance covered by the European Bank for Reconstruction and Development, the World Bank, Poland, Estonia and the Czech Republic, according to the statement.
Latvia, like Hungary, Belarus, Iceland and Serbia, turned to the IMF for financial support after its economy contracted 4.6 percent in the third quarter and the government was forced to take over its second-biggest bank. Fitch Ratings had previously estimated that the bailout could be about 5 billion euros, according to a baseline scenario.
“The financial assistance and the policy program are designed to enable the economy to withstand short-term liquidity pressures while improving competitiveness and supporting an orderly correction of imbalances in the medium term,” the European Commission statement said. The commission is the EU’s Brussels-based executive branch.
Latvia’s parliament passed measures to slash expenditures and cut public sector wages by 15 percent in 2009, and to reduce the budget deficit to less than 5 percent of gross domestic product as part of the agreement to secure the loan. The austerity program is equal to about 7 percent of GDP.
Latvia may “have to adjust the budget even more severely,” should the economic contraction be deeper than forecast, Prime Minister Ivars Godmanis said at the news conference in Riga today.
“These strong policies justify the exceptional level of access to Fund resources -- equivalent to around 1200 percent of Latvia’s quota in the IMF,” said IMF Managing Director Dominique Strauss-Kahn in an e-mailed statement today.
Latvia’s economy is expected to contract 5 percent next year, compared with a 10 percent expansion in 2007, as the cuts in government spending and revenue equal about 7 percent of its gross domestic product.
The 7.5 billion euro figure means Latvia is getting a bailout equal to about 33 percent of its estimated $30 billion economy, compared with Hungary’s $25.5 billion loan, which was equal to about 17 percent of its $147 billion economy, Ken Orchard, Vice-President and Senior Analyst at Moody’s Sovereign Risk Group, said in a telephone interview.
Latvia has more short-term debt than Hungary, Orchard said. Before the EU statement was released, Orchard said he expected the loan would reassure financial markets.