By Aaron Eglitis
Dec. 8 (Bloomberg) -- Latvia’s International Monetary Fund- led bailout package will involve loans from other European governments and will maintain the country’s currency peg to the euro, the IMF said.
The program “maintains Latvia’s current exchange rate parity and band,” said Christoph Rosenberg, IMF mission chief for the Baltic nation, in an e-mailed statement yesterday. Latvian Finance Minister Atis Slakteris on Dec. 4 told lawmakers that some IMF officials were seeking a devaluation of the lats.
Latvia, which joins Hungary, Ukraine, Serbia and Belarus among eastern European states asking for IMF financial help, may need as much as 5 billion euros ($6.3 billion), Fitch Ratings predicts. The economy may shrink 5 percent next year and, without spending cuts, the budget deficit may swell to 10 percent of gross domestic product, Slakteris said in the parliament.
The IMF is working with the European Commission, some European governments and regional and multilateral institutions, Rosenberg said in the statement.
The rescue plan “will require agreement on exceptionally strong domestic adjustment policies and sizeable external financing, as well as broad political consensus in Latvia,” Rosenberg said. “All participants are working to bring these program discussions to a rapid conclusion.”
The country has run a fixed exchange rate since the lats was reintroduced in 1993, first pegging it to a basket of currencies, and then to the euro at the beginning of 2005. Latvia has a quasi- currency board system, where the lats is backed by foreign currency and allowed to rise and fall against a midpoint per euro.
‘Good News’
Slakteris had warned that some IMF experts sought a currency devaluation as a way to help the economy recover.
It’s “good news” that the IMF does not favor a devaluation, said Lars Christensen, chief economist at Danske Bank A/S, by phone. “This will bring some comfort to the markets.”
The central bank said on Dec. 5 that its reserves fell about 30 percent in two months to $4.2 billion at the end of November as it defended the peg to the euro and the government took out money it kept in deposit. The bank bought 660.5 million lati ($1.2 billion) in the past nine weeks after the currency weakened to the limit of its band.
The government said on Dec. 3, it was increasing its stake in Parex Banka AS, the country’s second-biggest lender, to 85 percent from 51 percent as withdrawals mounted. The lender lost about 500 million lati in deposits since September and the government and banking regulator have imposed restrictions on withdrawals.
The economy of the former Soviet state that joined the European Union in 2004 contracted an annual 4.2 percent in the third quarter, the steepest drop since at least 1994. That compared with growth of 0.1 percent in the second quarter.
Industrial output fell for a sixth month in October, led by a decline in the production of furniture, paper and wood as the recession took hold. The unemployment rate rose to 6.1 percent in November, the highest level in 20 months.
Prime Minister Ivars Godmanis has said he will resign if lawmakers fail to approve his macroeconomic program, his spokesman Edgars Vaikulis said by telephone on Dec. 4.
To contact the reporter on this story: Aaron Eglitis in Riga, Lia, at aeglitis@bloomberg.net
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