EC calls for a medium-term loan to Latvia as part of coordinated financial assistance

The European Commission has agreed to propose to the Council to provide medium-term financial assistance to Latvia of up to € 3.1 billion. The proposed European Union loan is the biggest of the contributions put together with the Nordic countries and the IMF, among others, and which will total up to €7.5 billion. The financial assistance is conditional on a major economic adjustment programme already adopted by the Latvian government designed to limit and progressively correct the budgetary and other imbalances. Ultimately, it will put the Latvian economy on a sounder and more sustainable footing.

The proposed medium-term financial assistance to Latvia is being provided in conjunction with the International Monetary Fund (€1.7 billion), the Nordic countries (Sweden, Denmark, Finland and Norway - €1.8 billion together) and the World Bank (€0.4 billion). The European Bank for Reconstruction and Development, the Czech Republic, Poland and Estonia will together also provide €0.5 billion, bringing the total to up to € 7.5 billion over the period to the first quarter of 2011.

The support will consist of a European Community loan under Council Regulation 332/2002. The proposal is expected to be on the agenda of the next meeting of the EU finance minsters, on January 20th.

Commissioner for Economic and Financial Affairs Joaquin Almunia highlighted that “this support demonstrates Community solidarity with a Member State that, in return, has committed itself to undertake courageous but necessary adjustment measures at a time of great international economic and financial uncertainty. The Community looks to the Latvian authorities and people to sustain the implementation of Latvia's economic stabilisation programme, addressing the country's fundamental imbalances so as to provide a basis for a recovery of durable growth and, eventually, a basis for euro adoption."

The financial assistance will be disbursed in six instalments during the coming two years, the release of which will be conditional on the implementation of a comprehensive economic policy programme adopted by the Latvian authorities last month.

The financial assistance and the policy programme will enable Latvia to withstand short-term liquidity pressures while improving competitiveness and supporting an orderly correction of imbalances in the medium term, hence bringing the economy back on a sound and sustainable footing. This will also help meet the conditions for the adoption of the euro.

The programme is based on maintaining Latvia's existing exchange rate peg, which will remain a key policy anchor going forward, thereby underpinning systemic stability.

Key elements of the economic policy package are an immediate and sustained fiscal consolidation to limit the general government deficit to 5% of GDP in 2009, falling further to 3% of GDP in 2011. Supporting wide-ranging structural reforms and wage reductions, led by the public sector, will contribute to restoring Latvia's cost competitiveness. The programme also envisages measures to facilitate restructuring of domestic and external debt.

The policy conditions will be further detailed in a Memorandum of Understanding to be concluded shortly with the Latvian authorities. The Commission in collaboration with the Economic and Financial Committee will monitor regularly and closely that the economic policy conditions attached to the financial assistance are fully implemented and may request additional measures when and if circumstances so require.