LATVIA: CENTRAL BANK GOVERNOR SEES CREDIBLE BUDGET

C O N F I D E N T I A L RIGA 000516

SIPDIS

DEPT FOR US DEPT OF TREASURY DAVID WRIGHT

E.O. 12958: DECL: 10/13/2019
TAGS: EFIN ECON BTIO SW LG
SUBJECT: LATVIA: CENTRAL BANK GOVERNOR SEES CREDIBLE BUDGET
AS KEY TO ECONOMIC FUTURE

REF: A. RIGA 508

B. RIGA 494

C. RIGA 484

D. STOCKHOLM 632

E. RIGA 401


1. (C) Summary: The Bank of Latvia is downplaying the
severity of new budget adjustments and the likelihood of
significant mortgage relief, while admitting pressure on the
lat could intensify unless a serious budget is submitted
soon. The Bank is urging the early sale of Parex Bank. End
Summary.

Budget
--------------


2. (C) The Governor of the Bank of Latvia, Ilmars Rimsevics,
believes a credible 2010 budget is the key to Latvia's
economic future. Rimsevics said the political parties are
playing games with the country's credibility and hopes that
the Cabinet's October 12 decision to adjust the budget by LVL
500 million (USD1 billion) is not merely a trick to preempt
the October 13 visit of EC Economic and Monetary Affairs
Commissioner Joaquin Almunia. Meeting with Ambassador Garber,
Rimsevics downplayed the severity of the budget cuts as
merely a return to early 2007 spending levels, noting that
the government has yet to undertake serious structural
reforms. Rimsevics predicted that pressure on the lat will
intensify quickly if the government fails to submit a budget
by its self-imposed October 28 deadline. He said it should
be clear by next week whether the budget proposal is credible
once details of the newly announced targets of LVL 320
million (USD 640 million) in expenditure cuts and LVL 180
million (USD 360 million) in tax increases are made available.

Mortgage Proposal
--------------


3. (C) PM Dombrovskis' announcement last week of a mortgage
assistance proposal intended to limit the liability of
homeowners to current asset value brought a swift rebuke from
the Swedish government, the European Commission, and the Bank
of Latvia. Rimsevics said that this announcement was merely
an instruction to the PM's staff to explore the options for
mortgage assistance and that Dombrovskis would meet with the
banking industry next week to discuss the proposal.
Rimsevics noted that legislative proceedings would likely
amend any initial proposal, and stated that any proposal
would not be retroactive. He tried to downplay the
announcement's importance, admitting that he had spent time
in Istanbul last week trying to explain the PM's
announcement.

Pressure on the Lat
--------------


4. (C) Uncertainty about the prospects for the 2010 budget,
coupled with the mortgage assistance proposal, has renewed
speculation on the future of the country's currency peg.
Rimsevics said the Bank is still fully committed to 2014 euro
adoption and is prepared and able to defend the lat against
speculators. However, he admitted that the Bank made several
small interventions in the foreign exchange market over the
past week and that further delay in the budget process would
add pressure on the lat. He also pointed to a recent spike
in inter-banking lending rates and noted the similarity to
currency pressure in June when the 2009 Supplementary Budget
was still under consideration.

Resumed Growth: Budget Adoption/Parex Bank Sale Are Keys
-------------- --------------


5. (SBU) Rimsevics said it is difficult to pinpoint the
sector of the Latvian economy that will drive its recovery,
but that improving access to credit and restoring stability
to the Latvian investment climate are essential to a return
to economic growth, which he believes is possible by the 3rd
quarter of 2010 with a credible budget. Rimsevics said a
quick sale of Parex Bank is key to the restoration of
adequate private credit flows to Latvia. He said that
concerns that Parex's losses would continue under government
control has led the Bank of Latvia to conclude that all of
the components of Parex should be sold simultaneously, even
if it is broken up into parts through a restructuring plan.
Rimsevics concluded that it is more important to get Parex
off the government's books than to wait for a full recouping
of its equity investment.
GARBER