Latvian parliament backs IMF bailout deal

22.01.10 @ 09:16

  1. By Andrew Willis

A crucial vote in the Latvian parliament on Thursday (21 January) gave a renewed mandate to the government to continue talks with the International Monetary Fund and the European Union regarding the country's €7.5 billion bailout package.

  • Latvia has been the hardest hit by recession amongst the EU's 27 member states (Photo: European Commission)

The vote was precipitated following a ruling last month by the country's constitutional court against government pension cuts, drawing a question mark over the country's ability to meet the terms of the international lending programme agreed in December 2008.

But internal tensions within the ruling five-party coalition highlight the uneasy nature of the alliance, with the largest coalition partner, the People's party, rejecting the new mandate.

Prime Minister Valdis Dombrovskis, from third-largest coalition party New Era, played down the conflict, but added that the People's party had not behaved constructively.

"This is not a vote about the coalition, this is a vote about the international loan programme, which has won majority support in parliament," he told reporters after the result.

Fresh elections are scheduled to be held in October, although some analysts question the government's ability to hold on until then.

Before the vote Mr Dombrovskis had warned that a rejection of the mandate would endanger Latvia's financial stability, potentially leading to credit rating cuts and interest rate hikes.

The fractious coalition government of the small Baltic state of 2.2 million people is currently battling with an extremely tough economic situation after a decade-long boom imploded in 2008.

Deep wage cuts have resulted in sporadic bursts of social unrest as the country battles the deepest recession of the EU's 27 member states, with unemployment currently exceeding 20 percent.

Currency devaluation as a means of potentially boosting the country's exports has also been ruled out by Latvia's policy makers, who have instead opted for a tight peg with the euro in the hope of joining the European currency club in the coming years.

Financial markets have been nervous that Latvia's troubles could lead to regional contagion, although fears appear to have subsided in recent months. Sweden in particular has kept a close eye on Latvia's problems, with Swedish banks amongst the largest lenders in the region.

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