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World News: Latvia to Seek to Renegotiate Financial BailoutBy Andrew Higgins616 words10 March 2009The Wall Street Journal

A6English(Copyright (c) 2009, Dow Jones & Company, Inc.)

RIGA, Latvia -- Less than three months after securing a $10.5 billion emergencylifeline, Latvia -- the weakest link in an increasingly frayed chain of East Europeaneconomies -- is backtracking on a deal that the International Monetary Fund hopedwould reduce the risk of a regional meltdown.

Speaking in an interview Monday in Latvia's capital, Valdis Dombrovskis, the Balticstate's incoming prime minister, said he will seek a revision of major terms agreed

with the IMF, the European Union and other donors as soon as parliament confirmshis new government, likely Thursday.

"The country is on the verge of bankruptcy," said the prime minister designate, withthe nation hammered by its worst crisis since independence from the Soviet Union in1991. "I have never found myself in such a bad situation," said the onetime financeminister.

From 2000 until 2007, Latvia's economy grew 9% a year on average, the fastest ratein Europe. A member of the EU since 2004, it is now the bloc's worst performer. Itsprospects have darkened considerably since the rescue package was agreed upon inDecember, when Latvia's economy was expected to shrink by 5% this year. Thedecline now is officially forecast to be around 12%.

"It is possible that the real recession will be worse," warned Mr. Dombrovskis.Because of this, he said, Latvia will have a bigger budget deficit than an agreed levelof less than 5% of gross domestic product. The deficit, he said, likely will be at least7%, despite sharp cuts in public-sector salaries and other austerity measures.

Asked about Latvia on Monday in Brussels, Joaquin Almunia, Europeancommissioner for economic and monetary affairs, said: "I hope all the engagements

and commitments discussed with Latvian authorities can be implemented." He saidany reopening of talks would involve "very difficult negotiations because the situationis very difficult."

An IMF official said the fund "looks forward to continuing our discussions" once anew Latvian government is confirmed but declined to comment further.

Emergency aid to Latvia includes $4.3 billion from the EU, $2.4 billion from the IMF,and $2.5 billion from Sweden and other Nordic countries, whose banks are heavilyexposed in the Baltics. Only a small portion of this has yet been disbursed.

Though tiny, with only 2.3 million people, Latvia has stirred deep concern beyond itsborders because of fears that its woes could infect others. A December report by the

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MP nozmgks intervijas rvalstu pres 12.03. 10.03.2011.

IMF outlining the rescue package warned that "left unaddressed" Latvia's troubles"could spill over into other emerging European economies with similarvulnerabilities, as well as to West European countries whose banks are exposed to theregion."

Economists, however, disagree on the risks of "contagion" from Latvia, with somearguing that -- along with Lithuania, Estonia and Bulgaria -- it belongs to a specialclass of European countries that don't let their currencies float. Latvia's currency, thelat, is pegged to the euro, and most loans are denominated in euros.

Reopening talks with international donors could win Latvia a bit more room tomaneuver, but it is also fraught with risk as it would likely open discussion of thewisdom of the currency peg, which Latvia's central bank and politicians have tried toavoid.

The IMF, Mr. Dombrovskis said, was "initially in favor of devaluation" but backed

down, in part because of opposition from the EU, which worries Latvia might betempted to unilaterally adopt the euro. "We don't consider devaluation an option," hesaid.