Supplementary pensions (LVL 0.70 per year worked) will be cut only for those who retired after 1996. Pensions over LVL 500 per month will be limited to that amount, with any sum in excess withheld as a compulsory loan to the government. Teacher's salaries will be cut to the minimum wage per "shift" or teaching load, though it is unclear whether the old minimum of LVL 180 or the new LVL 140 will apply. This, in effect, means the public education system will collapse -- the only question is how fast. Younger teachers interviewed on evening television indicated they would, at the first opportunity, quit their subsistence-paying jobs and emigrate.
An ongoing TV discussion (as I write) is discussing whether any plan or priorities exist as to what to do next -- apparently there is no plan or vision. Also, there appears to be no funding (other than substantial EU structural funds, that are log-jammed somewhere in the bureaucracy) to stimulate the economy at a time when virtually all macroeconomic indicators are in free fall. It appears that we have a situation where the budget deficit is feeding off most efforts to cut the budget deficit by impacting purchasing power, raising unemployment and further deteriorating the remaining shreds of trust in the government.
I think that is the fundamental problem -- no one trusts that the present political elite and the government can solve the problem. It is no surprise that in a telephone vote, more that 5200 callers say it is time to take to the streets (whatever than means -- although the January 13 riots were a hint). There is a near-total breakdown of the social contract -- at least along these lines. The CEO of my workplace, LETA, Una Klapkalne, whose previous work was in government raised this issue at a brainstorming session with Prime Minister Valdis Dombrovskis and other ministers present. She said that whatever plans were drawn up, whatever schemes were sketched, it was all against the background of massive mistrust of the government by society.
Even if the government and the Saeima (parliament) succeed in approving the budget cuts and get the next payments from the International Monetary Fund (IMF), the EU and other lenders, the funds will merely prevent a government default. It will not inject a single santim (1 LVL = 100 santims) into the collapsing real economy.
My scenario -- a temporary boost if the Saeima approves what, at this point, amounts to cutting the carotid artery of the public sector with a resulting impact on the economy, quickly followed by a realization that things will spiral out of control again very soon. The international credit will simply pump more blood into the spurting artery (and, given the inefficiency and corruption of the government and ruling elite, much of the huge sea of billions of "liters" of blood will be sucked by parasites). When this is obvious to the financial markets, pressure on the lat and the "big tail" of the Swedish krona that this little animal can wag -- will increase. The Bank of Latvia, which says it has the entire supply of lats backed by foreign reserves, will come closer and closer to literally buying every lat on the market to keep the peg (effectively Euro-izing the bank accounts of those domestic actors selling lats.) Interbank and domestic interest rates will soar past the present 22 % and short-term funds will rush in to grab some of the shrinking pool of lats (possibly causing a bizarre spectacle of a seemingly strong but actually dead-but-not-fallen-over little mouse Latvian lat alongside a wildly swinging lat-surrogate krona). When the mouse falls dead, it is anybody's guess what happens -- probably freefall for the lat, a frightening dive for the krona and tremors across the Baltic and Eastern Europe.