“Fitch believed that a failure to maintain budget controls could delay the disbursement of international funds to Latvia, and lead to renewed pressure on Latvia’s currency,”.
The government collapse comes at a very delicate time, since an IMF mission is currently visiting, and growth (or should I say contraction) forecasts now suugest the contraction will be deeper than anticipated which will evidently mean further budget cuts. Latvia’s Finance and Economy ministries now estimate that the economy will contract 12 percent this year, revised from an earlier projection for a 5 percent reduction in gross domestic product. Latvia agreed to keep its budget deficit at 5 percent of GDP as part of its 7.5 billion euro bailout deal.
“A protracted delay in forming a new government or new elections could, however, delay the implementation of austerity measures and make it harder to keep the budget in line with objectives,” Fitch said in the statement. “This, in turn, could affect the disbursement of loans from the IMF and others.”
Fitch currently rates Latvian debt at BBB-, one level above junk, and “believes a failure of the IMF program would increase pressure on the domestic banking system and the currency peg, putting negative pressure on the country’s rating.”
“The extent of the recession and economic pain from the austerity measures being felt by the country increase the risk of a popular backlash and could thwart the sustained implementation of the IMF program,” Fitch said.