By Patrick Lannin and Balazs Koranyi
RIGA, June 16 (Reuters) - The parliament of Latvia backed sharp budget cuts on Tuesday as the country tries to win more European Union (EU) and International Monetary Fund (IMF) loans to prevent bankruptcy and possible devaluation.
Latvian financial markets were calm ahead of the vote as investors priced in a successful vote and looked ahead.
The measures including cutting public sector wages by a further 20 percent and pensions by 10 percent.
Unions plan a protest for June 18 and some politicians have predicted social unrest. Latvia had its worst post-Soviet riot in January, though it has been peaceful since then.
'This was a very important decision which allows us to continue to get international financing and avoid even more unpleasant consequences,' Prime Minister Valdis Dombrovskis told reporters after the parliament vote.
He said a decision from the EU and IMF on additional financing may come in the next day or so, possibly this week.
The EU and IMF both called the fiscal package adopted by parliament on Tuesday as 'courageous' and said they would need to assess the budgetary measures over the next days.
'Following this, a decision on the disbursement of the second tranche of the EU balance-of-payments assistance will be taken without delay,' the EU said.
The EU statement said full implementation of the measures was needed to achieve the budgetary consolidation foreseen for 2009 and 2010 and to lower the budget gap below the 3.0 percent of gross domestic product EU target by 2012.
IMF First Deputy Managing Director John Lipsky said in addition to containing the budget deficit, policies should ensure 'a path to medium-term fiscal sustainability.'
Latvia's parliament approved 500 million lats ($996.6 million) in savings in this year's budget, and a series of other laws related to the budget, after about 8 hours of debate and votes.
The government has said the cuts plus spending reductions of 500 million lats in each of the next two years, are key to getting the EU and IMF to release more funds from a 7.5 billion lats rescue package and prepare Latvia for adoption of the euro in 2013.
The country wants to keep the peg of its lat currency to the euro until it adopts the euro.
The budget was passed with 63 votes in favour and 30 against in the 100-seat house. Dombrovskis leads a five-party coalition that has 64 seats.
PROTESTS
The austerity plans have prompted protests from unions, even though the union federation chief signed up to them.
Social tensions are expected to rise on the back of the measures in the latest blow for an economy that had boomed since joining the EU in 2004.
However, the government has said it has put extra measures in place to ease the impact on households, noting that heating costs will be lower this year due to falling energy prices.
Teachers are among the most vulnerable, with the education minister saying they face salary cuts of 40 percent due to the new budget cuts that came on top of previous cuts.
The country expects 1.2 billion euros, including 1 billion euros from the EU, in late June or early July as part of the 7.5 billion euro rescue agreed last year.
Without the deal, analysts say Latvia risked insolvency and devaluation, which could hit other emerging European economies struggling with similar structural woes, as well as Swedish banks which are heavily invested in the region.
Some see devaluation just being delayed.
'We believe that devaluation in Latvia is only a matter of time,' Merrill Lynch said in a note, adding that international aid was sustaining the peg of the lat currency to the euro, but that devaluation was 'becoming increasingly mainstream.'
Nordea's Annika Lindblad disagreed: 'If Latvia secures the EU-IMF loan, I think it will come through without devaluation and the internal adjustment will be enough.'
The credit default swaps (CDS) market remained nervous, with Latvian spreads widening a touch, to 724.6 from 723.8 late on Monday. Spreads for Lithuania widened more sharply, to 498.6 from 487.5.
In Latvia, the lat was quoted at 0.6990/10 per euro, slightly stronger than on Monday and in the middle of the currency's trading band. Dealers quoted overnight rates at 1.00/3.00 percent, down from 3.80/8.60 percent on Monday and from levels above 20 percent late last week.
(Additional reporting by David Brunnstrom in Brussels and Lesley Wroughton in Washington)
(Editing by Stephen Nisbet) Keywords: LATVIA/ (Riga newsroom, patrick.lannin@reuters.com, balazs.koranyi.lannin.reuters.com@reuters.net, +371 29 269 191) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
RIGA, June 16 (Reuters) - The parliament of Latvia backed sharp budget cuts on Tuesday as the country tries to win more European Union (EU) and International Monetary Fund (IMF) loans to prevent bankruptcy and possible devaluation.
Latvian financial markets were calm ahead of the vote as investors priced in a successful vote and looked ahead.
The measures including cutting public sector wages by a further 20 percent and pensions by 10 percent.
Unions plan a protest for June 18 and some politicians have predicted social unrest. Latvia had its worst post-Soviet riot in January, though it has been peaceful since then.
'This was a very important decision which allows us to continue to get international financing and avoid even more unpleasant consequences,' Prime Minister Valdis Dombrovskis told reporters after the parliament vote.
He said a decision from the EU and IMF on additional financing may come in the next day or so, possibly this week.
The EU and IMF both called the fiscal package adopted by parliament on Tuesday as 'courageous' and said they would need to assess the budgetary measures over the next days.
'Following this, a decision on the disbursement of the second tranche of the EU balance-of-payments assistance will be taken without delay,' the EU said.
The EU statement said full implementation of the measures was needed to achieve the budgetary consolidation foreseen for 2009 and 2010 and to lower the budget gap below the 3.0 percent of gross domestic product EU target by 2012.
IMF First Deputy Managing Director John Lipsky said in addition to containing the budget deficit, policies should ensure 'a path to medium-term fiscal sustainability.'
Latvia's parliament approved 500 million lats ($996.6 million) in savings in this year's budget, and a series of other laws related to the budget, after about 8 hours of debate and votes.
The government has said the cuts plus spending reductions of 500 million lats in each of the next two years, are key to getting the EU and IMF to release more funds from a 7.5 billion lats rescue package and prepare Latvia for adoption of the euro in 2013.
The country wants to keep the peg of its lat currency to the euro until it adopts the euro.
The budget was passed with 63 votes in favour and 30 against in the 100-seat house. Dombrovskis leads a five-party coalition that has 64 seats.
PROTESTS
The austerity plans have prompted protests from unions, even though the union federation chief signed up to them.
Social tensions are expected to rise on the back of the measures in the latest blow for an economy that had boomed since joining the EU in 2004.
However, the government has said it has put extra measures in place to ease the impact on households, noting that heating costs will be lower this year due to falling energy prices.
Teachers are among the most vulnerable, with the education minister saying they face salary cuts of 40 percent due to the new budget cuts that came on top of previous cuts.
The country expects 1.2 billion euros, including 1 billion euros from the EU, in late June or early July as part of the 7.5 billion euro rescue agreed last year.
Without the deal, analysts say Latvia risked insolvency and devaluation, which could hit other emerging European economies struggling with similar structural woes, as well as Swedish banks which are heavily invested in the region.
Some see devaluation just being delayed.
'We believe that devaluation in Latvia is only a matter of time,' Merrill Lynch said in a note, adding that international aid was sustaining the peg of the lat currency to the euro, but that devaluation was 'becoming increasingly mainstream.'
Nordea's Annika Lindblad disagreed: 'If Latvia secures the EU-IMF loan, I think it will come through without devaluation and the internal adjustment will be enough.'
The credit default swaps (CDS) market remained nervous, with Latvian spreads widening a touch, to 724.6 from 723.8 late on Monday. Spreads for Lithuania widened more sharply, to 498.6 from 487.5.
In Latvia, the lat was quoted at 0.6990/10 per euro, slightly stronger than on Monday and in the middle of the currency's trading band. Dealers quoted overnight rates at 1.00/3.00 percent, down from 3.80/8.60 percent on Monday and from levels above 20 percent late last week.
(Additional reporting by David Brunnstrom in Brussels and Lesley Wroughton in Washington)
(Editing by Stephen Nisbet) Keywords: LATVIA/ (Riga newsroom, patrick.lannin@reuters.com, balazs.koranyi.lannin.reuters.com@reuters.net, +371 29 269 191) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.