LATVIAN LEADERS SAY DETERMINED TO IMPLEMENT FULLY

C O N F I D E N T I A L RIGA 000017 SIPDIS E.O. 12958: DECL: 01/08/2019 TAGS: EFIN PGOV PREL LG SUBJECT: LATVIAN LEADERS SAY DETERMINED TO IMPLEMENT FULLY FISCAL AUSTERITY REF: RIGA 811 Classified By: AMBASSADOR CHARLES W. LARSON JR. FOR REASON 1.4(D) ¶1. (C) Summary: Latvian leaders affirmed their commitment to full implementation of fiscal austerity measures negotiated with the IMF in farewell calls with the Ambassador. While PM Godmanis said he wanted to front load the cuts in the public service to get them over with as quickly as possible, he indicated that more politically challenging cuts in education and health care would be delayed until after local government elections in June. The government also wants to jump start the private sector to promote long-term growth. Zatlers and Godmanis agree that it will take three years to recover from this economic crisis. Zatlers looked forward to Latvia starting a "new life" in 2012. End Summary. ¶2. (C) Fiscal issues dominated the Ambassador's farewell calls with the President, Prime Minister and Ministers of Finance and Economy on January 7 and 8. Prime Minister Godmanis thanked the U.S. for its support during the recent IMF negotiations (reftel). He appreciated the U.S. position on the IMF Board as an ally where other countries were not so positive. Godmanis stated that he had wanted as small a package from the IMF as possible. Slakteris said he was happy with the amount received and expected it would be enough. ¶3. (C) Godmanis said that he wanted to implement the plan as quickly as possible, rather than spreading the pain over three years. Pledged reductions in the size and salaries of the public service should be fully implemented immediately, so people could begin looking forward rather than worrying that next year their job might be eliminated. Godmanis said that he expected to come to closure within the coalition by January 19 on a restructuring of agencies that would cut the size of cabinet from 17 members to 11. ¶4. (C) All leaders identified the required restructuring of health care and education as the most difficult parts of the plan. With elections for local governments (which oversee much of the delivery of these services) scheduled for June 9, the politics of these changes would be most difficult. Godmanis said that the plan would be developed and ready to go during the spring, but not formally adopted until the day after local elections. The school plan will be fully implemented by September 1 and health care by the end of the year. Slakteris noted that the time is good for making necessary reforms to education and health care, but wondered what political price the ruling coalition might pay. Gerhards also believed the two issues would be the greatest challenge in meeting the IMF package requirement, as reform will be unpopular because schools and clinics will need to be closed. ¶5. (C) Getting the private sector moving again would be an essential element to recovery, Godmanis asserted. The government would look to help entrepreneurs and small businessmen get moving again. He detailed a tough stance, stating that any business defaulting on a loan from the government would automatically be nationalized - no bankruptcy would be allowed. Gerhards noted efforts in the Ministry of Economy to create a more positive environment for entrepreneurship and private enterprise. ¶6. (C) Zatlers believed that the basic affect of the economic crisis is that the economy is back to where it was a year and a half ago. He thinks it will take three years for adjustment and recovery. Godmanis considered a similar time frame, but worried about the affects of the devaluation of currencies in Russia, Ukraine and Belarus, which are important export markets for Latvia. ¶7. (C) Comment: Although all officials were visibly concerned about the economic crisis in Latvia, they all believed they had cleared the first hurdle. The hard part is by no means over. Implementation of the package will be difficult and Latvians are bracing themselves for tough times, including a plunging housing market, increasing unemployment and a rise in crime and corruption. However, Zatlers does see a light at the end of tunnel, stating that in 2012 Latvia will start a "new life". End Comment LARSON