High praise for Dombrovskis' crisis leadership

RIGA - Latvia is in discussions to reduce the size of its bailout loan package after the country’s toughest austerity program has produced strong results in narrowing the budget deficit, said Prime Minister Valdis Dombrovskis, reports Bloomberg. “We have plenty of cash, we have already started negotiations with international lenders to use some of the next installments not as credit, but as a credit line,” Dombrovskis said in Riga. “We don’t need to pile up unnecessarily huge amounts of money in our Treasury and to pay interest on it.”

Dombrovskis, who took office in March last year after the previous government collapsed, said then that the state, suffering the deepest recession in the EU, was three months away from bankruptcy. The former central bank economist implemented an austerity program demanded by a group led by the European Commission and the International Monetary Fund, which stepped in with a 7.5 billion euro emergency loan package in December 2008.

The government sought the bailout, equivalent to 30 percent of Latvia’s output, after the failure of its second-biggest lender, Parex Bank. Dombrovskis said the government’s now in a position to seek buyers for the bank. “His performance has been outstanding, at least from the perspective of the international investor,” said JPMorgan Chase economist Yarkin Cebeci from Istanbul. “When he first took office, there was serious skepticism over this government’s ability to stay together and to implement the fiscal measures needed to keep the economic program and, hence, the currency peg intact.”

To keep the loan on track, Dombrovskis’ government cut spending, reduced state pay and raised taxes in a mid-2009 supplementary budget and again in the 2010 budget, together equaling about 9 percent of GDP. The government pushed through the cuts in June to get its loan through as interbank lending rates rose to record highs on speculation about currency devaluation. Now, “we are in the process of restoring credibility,” said Dombrovskis. “The RIGIBOR interbank rate is now not only at the lowest level since the crisis, it’s at the lowest level ever, so really we managed to stabilize financial markets.”

The three-month RIGIBOR lending rate on Monday fell to 2.45 percent, the lowest since the index was first calculated 12 years ago, and down from a peak of 29.8 percent on June 26 last year. The Treasury, which failed to sell any paper at an auction on June 3, sold two-year T-bills on Feb. 24, the first sale of such a maturity since May 2007. The government has liquid reserves equal to about 10 percent of GDP after 2.7 billion euros was transferred from its international loan. It is set to receive a further 2.7 billion euros this year.

“The international investor is now confident about Latvia and, in fact, is using the Latvian case as an example for countries who need to deliver on the fiscal front,” said Cebeci.
Even so, Latvia’s “susceptibility to event risk is high,” said Moody’s in a Feb. 10 report. “Although the risk of a disorderly currency depreciation has declined, the situation remains fragile. Latvia is especially reliant upon a recovery in the regional economy and European banking system to avoid an even deeper, more painful adjustment. The upcoming election in fall 2010 may delay implementation of some difficult measures and undermine confidence,” said the rating agency.

The economy contracted a preliminary 17.7 percent in the fourth quarter and retail sales dropped by a third, while the unemployment rate rose close to 20 percent. The economy may contract another four percent this year, according to some forecasts, though anything better will ease budget cuts next year, Dombrovskis said.
Parex bank will be the first company the state sells off, he said. “We are trying to find an investor, but not at any price,” Dombrovskis said. “There are quite a few offers being placed” that are being evaluated by the state asset sales department and the Finance Ministry, he said.

Peter Hambro, chairman of Petropavlovsk Plc, and a group of investors have submitted a bid for part of the bank. Peter Forster, chief operating officer of the Swiss-based Institute for Innovative Trading AG, and a group of investors are also bidding for a unit of Parex. “We have submitted a letter where we have announced our interest” in Parex’ Swiss subsidiary AP Anlage und Privatbank, Forster said.