VZCZCXRO1660
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSL RUEHSR
DE RUEHRA #0516 2890811
ZNY CCCCC ZZH
P 160811Z OCT 09
FM AMEMBASSY RIGA
TO RUEHC/SECSTATE WASHDC PRIORITY 6097
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

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