Latvia Bankruptcy Averted by Tough Budget Cuts

Latvia's prime minister hailed planned austerity steps on Friday as preventing state bankruptcy and unlocking more EU and IMF funds, but the prospect of salary and pension cuts caused anger and a protest promise from unions.

Even two of the social partners who signed up to a late Thursday deal to cut pensions by 10 percent and for a further 20 percent public salary reduction said they objected to the agreement, which economists say could stave off devaluation.

The parties decided against raising income tax via a progressive tax rate to replace the current flat rate to help find savings of 500 million lats ($1.01 billion) this year.

There was little evidence of tension on the streets of the capital, where the worst post-Soviet riots took place in January. The blogosphere, though, was fuming.

"Yes, with yesterday's decisions the state has really been saved from bankruptcy," Prime Minister Valdis Dombrovskis, who leads a five-party coalition, told public radio.

"The signals we have been getting from the European Commission are positive," Dombrovskis added at a conference.

He repeated he hoped for 1.2 billion euros this month or early July from the European Union and International Monetary Fund, part of a 7.5 billion euro rescue agreed last year.

Showing the political difficulties of the situation, Latvian media said President Valdis Zatlers, who attended the Thursday talks, had played a key role in ensuring a deal was reached.

The five-party coalition has backed the budget cuts, even though local and European Parliament elections at the weekend led to losses for the largest coalition party and Dombrovskis' New Era party did not do as well as opposition groups.

However, there are few public signs any party intends to take over the job which Dombrovskis is doing.

"I think all the parties understand that it would be irresponsible to bring down the government now," said Guntis Berzins, the New Era head of parliament's budget committee.

Berzins said the final vote on the 2009 budget would be on Tuesday, rather than Monday as Dombrovskis hoped. This would anyway be quicker than the June 17 date originally planned.

Parliament on Friday held the first of two sessions on the budget. The government is also to hold an extra session on Sunday to consider laws related to the 2009 budget.

The cuts include a 10 percent lower old age pension, a whopping 70 percent cut in the pensions of pensioners who still work and a 20 percent cut in state sector salaries.

The 70 percent cut in benefits for working pensioners effectively means they have to choose between work or a pension. The tax-free minimum will also be cut and allowances for parents reduced by 10 percent. The parties decided against introducing higher income taxes this year.

Parliament also decided on Friday to double excise duties on beer spirits, which state radio said would add about 2 santimes (4 U.S. cents) to the cost of a bottle of beer.

Dombrovskis said the government and social partners would start work soon on 500 million lats of cuts in the 2010 budget. Dombrovskis said the issue of incomes tax hikes would be further discussed.

A higher property tax and a tax on capital gains will be introduced in 2010, the government has decided.

Demonstration

Though the government parties agreed the measures with social partners — including employers, unions, the pension federation and local authorities' association — some of these groups said they were not happy with the agreement.

Baltic news agency BNS quoted the head of the Free Trade Union Confederation of Latvia as saying it would hold a protest meeting on June 18.

AP Prime Minister Valdis Dombrovskis with Latvian Flag

The head of the Pensioners Federation told the agency the government decisions were unlawful, although it was not planning any protests as it said they would be pointless.

Memories are fresh of January 13, when a peaceful protest turned into a rampage against the parliament building and through the cobbled streets of old city, though there has been little sign of a repeat of those events.

"I don't think people will go and burn down the government building because it will not change anything anyway," said Gunta Romanovska, 24, a worker from the city council of the eastern city of Daugavpils, who was visiting Riga.

Others said violence was a possibility, but noted a tradition of passivity and phlegmatism.

"Latvia is normally a calm country. When something happens people first wait to see what will happen," said Maksims Grigorievs, 23, a photographer.

On the Internet, comments were strong. "Saving (the country) by robbing from the poor! Super!" wrote one commentator on news portal Delfi.

"Latvia may be saved, it's just my life that is ruined," said another.

"I think people will do something. I want to do something. I think it could be like the riots again," added Grigorievs.

Pensioner Mara Vecmana, 62, said she got 200 lats ($404) a month in pension, which is considered a good level in Latvia, though she said she also got help from her family. "With my current pension I can get by, I really haven't been extravagant at all. Now I don't know. I think it will be very painful because my expenses don't go down," she said.

The crisis has led to speculation Latvia will have to devalue, a prospect which rattled markets in Sweden, whose banks are highly exposed to the Baltic economies, and in eastern Europe for fear of contagion.

But central bank interventions have drained the money market of lats and the lat has firmed to near the strong end of its peg to the euro. The interbank market has completly frozen.

The lat was quoted at 0.6961/71 per euro just off the one-year high of 0.6960 hit on Thursday.

The central bank buys euros and sell lats at the 0.6958 level, and buys lats and sells euros when it gets to 0.7098.

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