RIGA - Latvia's treasury has announced it would cancel nearly all its lat-denominated bond issues and instead offer capital market bonds in euros this fall, a radical break from previous policy and one that shows the government, like consumers, is hedging its risk to the increasingly out-of-favor lat.
State Treasury spokesman Martins Lacis told the Baltic News Service that the Finance Ministry has passed amendments to the state's borrowing schedule and decided to replace planned borrowings in lats with bond issues on international capital markets.
Lacis said that the decision was motivated by the government's goal to curb inflation and cut expenses, as well as to balance the 2007 budget. He said the government was likely to borrow 500 million euros on international capital markets.
He stressed the money would not be used to plug a deficit. "The resources borrowed from the international financial markets will not be used for financing additional expenses from the state budget, but for settling and refinancing of state debts, as well as ensuring issue of loans," he said.
Lacis said that the need to change the state's financial source was shown at recent auctions, which demonstrated sluggish demand for lat-denominated paper. What's more, interest rates have climbed in recent months because of inflation.
"Various events on the Latvian financial market have significantly increased interest rates in lats, not only for short-term transactions, but also for medium-term and long-term instruments," said Lacis.
"Therefore, before the domestic financial market shows convincing and sustainable signs of improvement, the State Treasury will issue securities in very limited amounts, using the international finance and capital market for ensuring the necessary financing," said Lacis.
Since the beginning of the year Latvia's government has come under intense criticism from the international financial community for not doing enough to address the country's macroeconomic imbalances 's i.e., high inflation, soaring labor costs, and a consumption spree fueled by easy-to-get loans.
