THE CHALLENGES OF GOVERNMENT FORMATION IN LATVIA

C O N F I D E N T I A L SECTION 01 OF 02 RIGA 000102

NOFORN
SIPDIS

E.O. 12958: DECL: 02/23/2029
TAGS: PGOV PINR ECON LG
SUBJECT: THE CHALLENGES OF GOVERNMENT FORMATION IN LATVIA

REF: A) RIGA 74 AND PREVIOUS B) RIGA 75

Classified By: A/DCM Tamir G. Waser. Reason: 1.4 (D)


1. (C/NF) Summary: The resignation of the Godmanis government
leaves Latvia without a leadership team as the country faces
a number of difficult decisions related to its economic
situation, although it had already been doing only the
minimum to get by. If a government is formed quickly, it
would likely mean deferring decision on additional budget
cuts for a few weeks, when they will not be any easier. If
those issues are tackled upfront, it will complicate the
process of forming a new government. Some in the current
opposition are suggesting that if they get in to a new
government, they would be willing to forgo new parliamentary
elections, but the public is likely to have a strongly
negative reaction if that were to occur. The key player in
coming weeks is President Zatlers, both in whom he chooses to
form government and what he decides to do with his March 31
deadline for action on certain issues. End summary.


2. (C/NF) PM Godmanis' February 20 resignation creates a
vacuum at the top at a time when the country needs to be
working on implementation of fiscal austerity and economic
assistance measures. At the same time, the smoldering
political crisis of the past few weeks meant that tough
decisions were being avoided and cuts were being made without
any real analysis of the best way to implement the necessary
reforms. But until a new government is confirmed, the
caretaker administration cannot take any new, substantive
decisions and lacks the ability to ensure legislative
approval of any controversial measures already in progress.


3. (C/NF) This problem is most acute in the area of the
budget, where Latvia has a March 31 deadline for adopting
budget cuts to meet updated economic forecasts. Last week,
the government revised its predictions of economic
contraction for the year from 5 percent to 12 percent. That
requires an additional cut of 10 to 14 percent in the budget,
beyond the painful cuts already made. Those new cuts will
likely hit social programs hard, further fueling public
anger. For example, PM Godmanis had already been predicting
a cut in unemployment benefits given the reduced funds and
continued growth in unemployment.


4. (C/NF) Various politicians have boldly predicted that a
new government can be formed within a week. We are
skeptical. If the new coalition attempts to form a
government without addressing first how it plans to manage
these upcoming budget cuts, it will be an unstable government
from the start. If parties try to come to agreement on these
issues prior to taking office, coalition formation will take
more time.


5. (C/NF) There are also questions about the size of the new
cabinet since the Godmanis government fell ostensibly over an
inability to agree on how to reduce the number of ministries.
Legally, the new government must consist of the same number
of ministries as the old one, unless parliament first changes
the law on the cabinet. If there is an attempt to do this,
it will further complicate coalition talks.


6. (C/NF) Hanging over all of this is the possibility of
early elections, spurred on by the President's January 14
ultimatum that certain things be done by March 31 or he will
initiate a dissolution of Saeima. It is nearly impossible to
see those tasks being completed on time, but if everyone
knows that elections are coming soon, it will be hard to form
a stable and effective government. Sources tell us that
politicians in the current coalition as well as in the
current opposition are prepared to argue that the fall of the
Godmanis government changes the equation and renders the
President's ultimatum moot. One opposition politician
bluntly told us that his party was fine either with or
without early elections, especially if his party got into the
new government. The public, however, is unlikely to share
that view. The fall of the Godmanis government has only
increased the public's support for new elections. If they
feel that politicians scheme their way out of accountability,
the reaction could be quite ugly.


7. (C/NF) In this situation, the key player is President
Zatlers. Under the constitution, he has the sole right to
name a candidate for Prime Minister. He is consulting
parties on February 23 and 24 to hear their views. So far,
he has strongly rejected the idea of selecting a PM from
outside the parties, saying that the parties need to be
accountable for their past actions. And in a February 22
interview, he said that how the parties plan to address the
budgetary issues, especially in social sectors, will be key
in making his decision. His rather erratic decisions of the
past six weeks offer little guidance as to whether he will

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stick to his principles in this process, or simply accept a
person that the parties say can secure 51 or more votes in
Saeima. He has also offered no insight about how he plans to
deal with his March 31 deadline. If he backs off of it, we
could face a situation in Latvia in which no institution of
government has the public's trust and that would be a real
disaster.
ROGERS