Latvian Coalition Walk-Out May Provoke ‘Ineffective’ Government
March 17, 2010, 7:07 PM EDTBy Milda Seputyte and Aaron Eglitis
March 18 (Bloomberg) -- Latvian political uncertainty precipitated by the walk-out of Prime Minister Valdis Dombrovskis’s biggest coalition partner may trigger “ineffective” government and a “negative” market reaction, Danske Bank A/S said.
The premier, who took office a year ago during the former Soviet state’s worst economic crisis in two decades and forced through the European Union’s toughest austerity program, was left heading a minority administration after the People’s Party quit yesterday in protest over economic policies.
The People’s Party recalled its five Cabinet members after Dombrovskis refused to sign an agreement between the party and his own New Era group yesterday. It called for delaying tax increases this year and next and fewer ministries. The premier now controls 44 seats in the 100-member legislature with four unaligned deputies. A general election is scheduled for October.
“Political risk and uncertainty are on the rise again,” Violeta Klyviene, senior Baltic economist at Danske Markets in Vilnius wrote in a note. “This might disrupt confidence in the Latvian economy and bring renewed pressure to the financial market. The market reaction to this event might be relatively negative.”.
The central bank cut its benchmark refinancing rate to 3.5 percent from 4 percent on March 11, the first reduction this year after rates in the interbank lending market dropped to record lows.
‘Stability’
Asking rates on the three-month Rigibor have fallen to 2.23 percent, the lowest since the central bank began calculating the index 12 years ago. The three-month rate climbed to a high of 29.8 percent on June 26 when speculation mounted that the country would have to devalue its currency.
Dombrovskis appealed yesterday to the People’s Party for “political stability” to ease concern in financial markets and to ensure “fiscal stability,” the Riga-based government said in an e-mailed statement.
“A policy that is truly responsible for the country cannot be self-centered and categorical,” Dombrovskis said in the statement. “One party cannot become a guarantee for political stability in a country where five parties are represented in the government coalition.”
Raimonds Vejonis, chairman of another coalition partner, the Greens and Farmers Union, said that if the People’s Party leaves the coalition, his group would continue to support Dombrovskis, the Baltic News Service reported.
‘Intact’
“We think that the remaining four parties will continue to support the coalition and the minority government will remain intact until the elections,” said Yarkin Cebeci, an economist at JPMorgan Chase & Co. in Istanbul.
The Baltic nation turned to a group led by the European Commission and the International Monetary Fund for a 7.5 billion- euro ($10.3 billion) rescue loan in 2008 after taking over its second-biggest bank. The government has passed budget cuts equal to about 10 percent of gross domestic product in an effort to comply with the terms of its credit.
“Recently, the IMF praised Latvia for its progress in meeting the terms of its bailout package,” wrote Klyviene. Still, the funf “warned of significant risks ahead and urged the government not to move to a fiscal easing option.”
The economy shrank a revised 16.9 percent last quarter after retail sales dropped by a third and the jobless rate approached 20 percent. Output slumped 18 percent in all of last year.
“No-one wants to bring this government down so it seems like it will stumble along until the elections,” said Nils Muiznieks, a professor of political science at the University of Latvia, by telephone. “I would be very surprised if this government can adopt the budget, or take any serious steps” until “after the election.”
--Editors: Alan Crosby, James M. Gomez
To contact the reporters on this story: Milda Seputyte in Vilnius at 5 269-0046 mseputyte@bloomberg.net Aaron Eglitis in Riga at aeglitis@bloomberg.net
To contact the editor responsible for this story: Chris Kirkham at ckirkham@bloomberg.net
