Vilks optimistic on bond sales

RIGA - Latvia must fight “consolidation fatigue” to cut the budget deficit, win an investment grade rating and sell as much as 1.5 billion euros of euro-denominated bonds this year, said Latvian Finance Minister Andris Vilks, reports Bloomberg. The European Commission and the International Monetary Fund have called on the Latvian government to make an additional 50 million lats (71.4 million euros) of sustainable spending cuts and revenue increases this year. The country has implemented austerity measures equal to 14 percent of gross domestic product since the lenders approved a 7.5 billion euro bailout package in late 2008.

Latvia must adopt additional budget measures, probably in the next two months, before its credit rating will be lifted, allowing for the sale of euro bonds, Vilks said on Jan. 18 in an interview in Brussels. While the amount of the offering hasn’t been determined, it may be as much as 1.5 billion euros, he said.
The supplemental budget “is demanded by the international side, the credit rating agencies and investors,” Vilks said. “This is up to us, and I hope we will be able to deliver.”

Latvia’s two-party coalition government, which holds 55 seats in the 100-member parliament, is divided over where to find additional savings, said the news Web site Ir.lv.
Latvia last tapped the Eurobond market in March 2008, when it sold 400 million euros of bonds due 2018. The yield on that bond fell 2 basis points on Jan. 18 to 5.209 percent, compared with almost 12 percent in March 2009.

Standard & Poor’s last month raised Latvia’s debt rating one level to BB+, one step below investment grade. Fitch also rates Latvia BB+, its highest junk grade. With an investment-grade Baa3 rating at Moody’s Investors Service, Latvia needs to climb one more step at either S&P or Fitch to make its debt eligible for more investment funds.
“There is, understandably, a degree of adjustment fatigue,” Anne-Marie Gulde-Wolf, a senior adviser at the European department of the IMF, said in an interview at the Euromoney conference in Vienna on Jan. 18. Latvia needs to “build agreement in the coalition on those measures,” she said.

Latvia, which plans to cut its budget deficit to 3 percent of GDP in 2012 and adopt the euro two years later, should seek to beat the target “with a margin,” Gulde-Wolf said. Failing to take necessary steps now may “backload the process and make it more difficult politically and more uncertain,” she said.
The government, backed by international lenders, opted for a strategy of bolstering competitiveness by forcing prices and wages to fall, the so-called ‘internal devaluation.’ Latvia decided against letting the lats depreciate, keeping it pegged to the euro to protect foreign-currency lenders and borrowers. As a result, the economy shrank almost 25 percent during the global financial crisis.

Now, the economy is beginning to recover, expanding 2.9 percent in the third quarter, the first annual expansion in 10 quarters. “We hope we will be able to explain this to the public,” Vilks said. “We don’t want to destroy this very good example which is Latvia. We want to finish this very dramatic story.”