Dombrovskis says Greece should 'get real'

RIGA - Euro members facing “dramatically” rising debt burdens need to push through budget cuts on a similar scale to those imposed by Latvia, said Prime Minister Valdis Dombrovskis, reports Bloomberg. The Dombrovskis-led government is credited with leading Latvia through the European Union’s toughest austerity measures last year. His comments came as Greek Prime Minister George Papandreou was working to convince his fellow citizens last week to accept budget cuts denounced as “unjust” by the country’s unions.

Euro-region governments agreed to a 110 billion euro ‘healthcare’ plan for Greece, a 3 year bail-out package calling for a combination of loans and structural changes to the government and economy to help the country stay afloat through a debt crisis that’s contributed to a 12 percent slide in the euro since a Nov. 25 peak.
Latvia’s 7.5 billion euro IMF and EU program has helped restore investor confidence, though the country’s budget cuts led to an 18 percent economic contraction last year.

“For the eurozone, there is no [possibility] for [currency] devaluation, so internal devaluation and fiscal adjustment seems to be the only available tool,” Dombrovskis said. “We seem to be proving that we were able to manage something many thought was impossible - an internal devaluation.”
Dombrovskis imposed fiscal cuts equivalent to about 10 percent of GDP after receiving the bailout in 2008. Greece was downgraded to junk by Standard & Poor’s on April 27, and its debt is now one level higher than Latvia’s BB grade. S&P on Feb. 12 raised Latvia’s outlook to stable.

Latvia, which maintains a fixed-exchange rate for the lats to the euro, has pushed through spending and wage cuts to restore competitiveness and reduce debt as an alternative to devaluing the national currency.
Dombrovskis said many new euro members were “too optimistic” in assuming that strict budget controls needed to join the bloc could be eased once accession was achieved. Latvia was “negligent” in responding to its imbalances, he said, adding “reform starts where the money ends.”

Latvia’s economy “needed painful remedies” after ignoring early warnings that a credit-fueled boom was unsustainable, Dombrovskis said. The government cut public wages by 25 to 28 percent and reduced public administration by 20 percent, or a total of 14,200 state jobs, he said.

Latvia’s deficit widened to about 9 percent of GDP last year, according to EU methodology. The Riga-based government has pledged more spending cuts in the next two years to comply with the euro-adoption ceiling of 3 percent. The deficit is projected to narrow to 8.5 percent this year, the prime minister said on April 30.

Stronger sanctions are needed in the euro area to deal with members that breach monetary union rules, which are “sufficient to ensure macroeconomic stability,” Dombrovskis said. “The problem is not the Maastricht criteria; the problem is that most of the euro zone countries do not follow the Maastricht criteria,” added Dombrovskis, and that “The problem should be addressed by introducing a control mechanism to ensure that countries in the eurozone follow all rules.”
Dombrovskis expects to “restore credit ratings in a relatively short time” after Moody’s Investor Service and Standard & Poor’s revised their outlooks for Latvia to stable, from negative, in the past two months. Latvia’s 5-year credit-default swaps dropped from a peak of 752.6 (7.526 percent) in June last year on devaluation concern, to 313.9 on April 29. Greece’s CDSs closed at 1,119.7 on April 29. Latvia’s CDS rates have been affected by the Greek crisis in recent days, Dombrovskis noted.

The outlook for the Latvian economy is now “more optimistic” than the government’s estimate of a 4 percent contraction this year, and a recovery may come “somewhat faster than projected,” he said.
The government’s “biggest problem now remains unemployment,” which rose to 17.2 percent in April, and “it’s going to stay the biggest social problem this year and next,” he said. Dombrovskis also warned that a general election scheduled for October may jeopardize political commitment to the country’s austerity package, which could entail “a double-dip recession.”