DEMARCHE ON LATVIA,S FINANCIAL SITUATION

C O N F I D E N T I A L STATE 059967

SIPDIS

E.O. 12958: DECL: 06/11/2024
TAGS: EFIN PGOV PREL ECON EUN IMF LG
SUBJECT: DEMARCHE ON LATVIA,S FINANCIAL SITUATION

REF: A) RIGA 318 B) RIGA 314 C) RIGA 290 D) RIGA 238
E) RIGA 182

Classified By: EUR A/S Stuart Jones, Acting

BACKGROUND
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1. (C/NF) The Department agrees with post,s assessment, Ref
A, that the Latvian government,s (GOL,s) implementation of
the terms of its IMF/European Commission assistance package
thus far has been inadequate and that its pending proposals
for budget cuts lack credibility. The time is right for the
USG to make its concerns known at the highest levels of the
GOL and to emphasize that the GOL must implement without
delay a strategic plan to cut government expenditures in line
with the criteria put forward by the IMF, as part of a
medium-term strategy to achieve a budget deficit that does
not exceed three percent.


2. (C/NF) The GOL plans to vote on its pending budget o/a
June 17. In order to ensure that our message is heard in
time to influence the final draft of the budget, we believe
that post must approach the highest levels of the GOL as soon
as possible to convey U.S. views.

TALKING POINTS
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3. (SBU) The Department requests that Post draw on the
background and points provided to communicate to the Latvian
Prime Minister, Speaker of the Parliament, Justice Minister
(as head of the People,s Party) and President the views of
the U.S. government on Latvia,s financial situation.


4. (SBU) BEGIN POINTS:

-- The United States is concerned about the relatively slow
pace of implementation of the structural reforms required by
the agreements with the IMF, European Commission, and others.
Since December, many plans have been announced but few
implemented. We are longstanding friends and Allies, and we
present these impressions out of a desire to help.

-- We support the goal of the IMF program, which is to set
Latvia on a sustainable path to meet the Maastricht criteria
so that it can join the Euro-zone.

-- We welcome the June 8 agreements between the GOL and
social partners to cut an additional 500 million lats from
this year's budget.

-- A strategic view is needed, not simply percentage cuts in
various sectors. We strongly encourage you to work with IMF
experts in country. Making budget cuts now will lend
credibility to Latvia,s medium-term goals of reducing the
annual budget deficit to three percent of GDP, successfully
completing its IMF program, and adopting the euro.
Establishing credibility for the medium-term outlook is key
to maintaining confidence in the Latvian economy and limiting
market speculation.

-- Financial markets have noticed Latvia,s reluctance to
make hard decisions. While speculation about a future
devaluation of the lat may overstate the situation, it is
clear that if Latvia does not demonstrate the will to create
significant wage deflation, external pressure to devalue will
only continue to build.

-- Latvia may not have a lot of time. Opinions are
crystallizing and markets reacting. Progress on needed
budget cuts is needed now. It is essential that the
government and Saeima adopt a strong, credible plan before
going on summer recess.


5. (U) Please report responses by June 15, slugging
responses for EUR/NB ) Carol Beilman Werner and EEB/OMA )
Julia Jacoby.
CLINTON