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The Associated Press June 5, 2012, 1:28PM ET

IMF chief praises Latvia for handling crisis

The International Monetary Fund's managing director on Tuesday praised Latvia, which recently emerged from what has been considered as the world's worst national recession, for its "collective determination and resilience" in solving its economic problems and said the Baltic country could serve as an inspiration for European leaders grappling with the euro crisis.

Speaking to a conference in Riga, the Baltic state's capital, Christine Lagarde said Latvia made a crucial decision when it decided "to bite the bullet" and make drastic changes to the budget through a mix of tax increases and spending cuts.

"Instead of spreading the pain over a number of years, doing it gently, you decided to go hard and to go quickly," she said, adding that Latvia's budget adjustment amounted to 15 percent of GDP over three years.

"It's hard to believe when you look back that you actually did it," Lagarde said. "We see the success of the program as a real achievement, a real tour de force."

Once it slipped into recession in 2008, Latvia had to accomplish what many eurozone countries such as Greece and Spain are being asked to do -- restore competitiveness through austerity measures, such as public sector wage cuts, and not a currency devaluation.

Though Latvia is not a member of the 17-member euro area, the country's leadership decided to keep the currency pegged to the euro, which meant that it couldn't devalue to restore competitiveness -- a move countries like Iceland and Argentina have used in recent years.

Lagarde said the IMF, which has tended to advice troubled economies to devalue, a move that immediately strengthens exports, was not convinced Latvia could pull off a stable currency-recovery, but eventually came around to accept the arguments of Latvia and its supporters in the Nordic countries.

As a result of the measures, unemployment in Latvia catapulted to nearly 25 percent, while economic output shrank by 23 percent over three years. The IMF has described it as the worst sovereign crisis in the world.

The country was forced to ask international lenders such as the IMF and the European Union for a (EURO)7.5 billion ($9.33 billion) rescue loan.

Latvia's economy grew by a surprising 6.9 percent in the first quarter compared with the same period last year. The country hopes to adopt the euro in 2014 despite the currency's current problems.

However, Jorg Asmussen, a member of the European Central Bank, said Tuesday that Latvia is unprepared to adopt the euro because there are doubts the country will be able to maintain low inflation or budget deficits over a long period of time, particularly the years just after joining the currency zone.

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