LATVIAN GOVERNMENT SURVIVES POPULIST CHALLENGE

C O N F I D E N T I A L SECTION 01 OF 02 RIGA 000038 SIPDIS E.O. 12958: DECL: 01/21/2020 TAGS: PREL PGOV ECON LG SUBJECT: LATVIAN GOVERNMENT SURVIVES POPULIST CHALLENGE Classified By: PolEconCounselor Brian H. Phipps, Reasons 1.5 (B) and (D ) ¶1. (C) Summary: Latvia's government survived a challenge from within the ruling coalition in a 54-22 parliamentary vote on January 21. The populist People's Party sought to block a resolution affirming the government's ability to negotiate loans with international lenders, particularly the IMF, and, instead, to pass a law placing unworkable restrictions on such negotiations. While this was not technically a vote of confidence, if the People's Party had been successful, the political and economic consequences would have been severe, and would have reversed a growing sense of confidence that the Latvian economy is pulling out of its two-year nosedive. The main opposition parties exhibited statesmanship (or at least strategic political thinking),one largely supporting the government and one stepping aside from the fight. Further political crises may still occur between now and October elections, but the Prime Minister and Finance Minister, both of the center-right New Era Party, now find themselves on relatively stable ground. Populism R Us -------------- ¶2. (C) The People's Party, the largest member of the coalition with 19 seats in Parliament, is facing political extinction. The party performed exceedingly poorly in June 2009 local and European elections. The return of the superwealthy three-time former Prime Minister Andris Skele to party leadership has failed to revive the party's fortunes in public opinion polls. Faced with the possibility of exclusion from Parliament by failing to meet the five-percent threshold in October 2010 elections, the party has stepped up its populist message, objecting to the tax hikes and budget cuts demanded by the terms of international lenders, including the IMF, the EC, and Nordic states. ¶3. (C) While several of the People's Party ministers within the cabinet, including Foreign Minister Maris Riekstins, have continued to perform their duties professionally and responsibly, Justice Minister Mareks Seglins and Local Government and Regional Development Minister Edgars Zalans have been disruptive and obstructionist, publicly denouncing Prime Minister Valdis Dombrovskis and Finance Minister Einars Repse and storming out of a cabinet meeting. Other coalition members have grown exasperated by the People's Party, but 
kicking the party out of the cabinet would leave the government several votes short of a majority. For its part, the People's Party continued to enjoy its access to the levers of patronage and power within the cabinet. Showdown -------------- ¶4. (C) When Latvia's Constitutional Court ruled in December 2009 that earlier pension cuts had not been sufficiently justified by the government, it also ruled that the government needed an explicit mandate from Parliament to negotiate for loans. The Finance Ministry drafted a resolution allowing them a broad mandate, but the People's Party proffered a draft law of its own that would require separate parliamentary votes on each amendment to international lending agreements, prohibit further tax increases, and require parliamentary approval for the restructuring of commercial banks. For a while, it appeared that the People's Party was merely posturing, and was unlikely to force a vote which could bring down the government, scuttle the agreements with the IMF and others, cause major economic turmoil, and take the party out of its share of power. Political Commentator Pauls Raudseps told us early on the morning of January 20 that the party was merely seeking attention and leverage and was not willing to go to the "final extreme." ¶5. (C) By the afternoon of January 20, it became clear that the People's Party was indeed serious. The PM's economic advisor (please protect) told us that he had received panicked calls from the Treasury throughout the day that sufficient reserves were unavailable to defend Latvia's currency adequately from heavy devaluation pressure, should the governmen resolution fail and international confidence be lost. The advisor thought that while the resolution might survive, there was a good chance that Finance Minister Repse would find his report on the IMF agreement rejected by Parliament. Such a rejection, while not strictly a vote of no confidence, would make it difficult for Repse to stay on, and would weaken the government's credibility. That evening, an ashen-faced IMF resident representative privately shared commiseration that "a pack of jokers" was about to undo all the hard work he and the Finance Ministry had done to put Latvia on the path to recovery. RIGA 00000038 002 OF 002 Saved by the Enemy -------------- ¶6. (C) When the smoke finally cleared the next day, the government resolution was left standing, and the People's Party found itself out in the cold, supported only by the five votes of far-left, predominately ethnic-Russian "For Human Rights in a United Latvia" party. Former Prime Minister Andris Berzins of the opposition Latvia's First Party/Latvia's Way apparently put country (or at least long-term ambitions) ahead of short-term partisan politics and delivered seven of his party's 10 votes to vote for the resolution and five to support the Finance Minister, who sruvived a 52-21 vote. Former Prime Minister Ivars Godmanis (also from this party) told us that the party had no desire to be in government under current economic conditions. He and Berzins had counseled the party's chairman, Ainars Slesers, that now was not the time to bring the government down at that it was better to wait until October, in the expectation that the rival People's Party would be driven out of Parliament entirely. The leftist and predominately ethnic-Russian Harmony Center opposition party stood apart from the fray, casting "null ballots" after winning some minor semantic changes in the language of the resolution, also recognizing that it was better to wait until October elections than to play into Andris Skele's hands. ¶7. (C) Comment: While the current government is far from home free, and challenges will almost certainly arise again before October elections, the Prime Minister and Finance Minister are both in a more solid position for surviving this long-threatened assault by the People's Party. However, there are almost certainly some political favors they now owe Berzins and the leaders of Harmony Center. GARBER