LATVIA: 2010 BUDGET DEMARCHE RECOMMENDATION: DEPARTMENT

UNCLAS RIGA 000508

SENSITIVE BUT UNCLASSIFIED

SIPDIS

E.O. 12958:N/A
TAGS: EFIN ECON ECIN PGOV PREL SW LG
SUBJECT: LATVIA: 2010 BUDGET DEMARCHE RECOMMENDATION: DEPARTMENT
GUIDANCE REQUESTED

REF: A. Meyer-Garber 10/8/09 e-mail; B.RIGA 494, C. RIGA 484 D.
STOCKHOLM 632, E. RIGA 238, F. RIGA 191


1. (U) This is an action request.


2. (SBU) Post seeks Department concurrence on a draft demarche to be
delivered to appropriate GOL officials (including the Prime
Minister) regarding Latvia's 2010 budget. The demarche will urge
the government of Latvia to abide by its signed commitments to the
International Monetary Fund and the European Commission and pass a
credible 2010 budget that reduces the fiscal deficit by 4 percent of
GDP or LVL 500 million (USD 1 billion).


3. (SBU) The following are our recommended points for the demarche:

-- The U.S. will continue to support Latvia during these very
difficult economic times and we pledge to work with Latvia as it
seeks to return to sustainable economic growth.

-- We understand that Latvia is facing some very difficult choices
and legitimate concerns about the impact of additional expenditure
cuts and/or tax increases envisioned in the 2010 budget.

-- We welcome the significant progress made so far.

-- Nonetheless, we strongly urge the government of Latvia to abide
by its commitments to the International Monetary Fund and the
European Commission and pass a 2010 budget that reduces the fiscal
deficit by 4 percent of GDP or 500 million LVL.

-- If Latvia does not honor its commitments it will be difficult to
support further disbursements. The credibility of Latvia's program
and its exit to successful euro adoption is at stake.

-- Failure to abide by these commitments would undermine confidence
in the government of Latvia to implement the program consistent with
its stated goals and could lead to unintended consequences,
including further downgrading of Latvian debt, immediate calls on
its loans and even a possible run on Latvia's currency.

-- The agreement reached with your government clearly states that
the 500 million LVL in budget adjustment for 2010 should not be
achieved only through expenditure cuts. This would be too hard on
society, particularly for low-income families. We consider it
important to safeguard social safety nets as agreed with the IMF and
EC, to ensure a fair distribution of the adjustment on the
population.

-- Although Latvia's adjustments have been painful, there appears to
be some renewed, but cautious interest in Latvia from investors.

-- Changing course now could undermine this progress.

-- As Latvia implements fair and equitable policies to ensure
long-term fiscal stability and eventual euro adoption, the U.S. will
continue to search for opportunities to strengthen our bilateral
economic relationship through trade and investment opportunities.

-- Finally, we would like to reiterate our previous offers of
technical assistance in support of these difficult budget decisions.


#GARBER