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