Latvia secures €7.5bn rescue deal

LATVIA HAS become the latest eastern European nation to secure a rescue package from international lenders, after the Baltic state's economy nose-dived following years of rapid growth.

The European Union and International Monetary Fund will lead contributions to a €7.5 billion package to stabilise Latvia's economy and currency, which was agreed upon after the government pledged to slash public spending and reduce its budget deficit, with the aim of adopting the euro in 2012.

Latvia has been among the EU's most dynamic economies since it joined the bloc in 2004, with annual growth peaking at 12.2 per cent in 2006. Much of that growth stemmed from credit-fuelled consumer spending and property price rises, however, leaving the country vulnerable to the economic slowdown and the severe tightening of credit markets.

Hungary is the only other EU member to have received IMF funding. The organisation has also extended emergency loans to Ukraine, Iceland and Pakistan, has agreed a stand-by deal with Serbia, and is in talks with Belarus.

The board of the IMF might meet today to give final approval to Latvia's loan deal, which envisages the country keeping the lat currency pegged to the euro.

Latvia's parliament agreed to cut expenditure and bring down public sector wages by 15 per cent in 2009, and to reduce the budget deficit to less than five per cent of gross domestic product.

The government predicts a fall in GDP of 5 per cent next year and 3 per cent the year after, before growth resumes in 2011.

Some analysts believe the contraction could be even sharper than that, however.

"It seems the price to pay for keeping the exchange peg will be a much deeper and protracted recession than even we had expected," said Neil Shearing, of Capital Economics in London.