Valdis, Valdis, what the fuck?????

If high EU and IMF officials could write what they really thought about Latvia's political bardak*, the headline is how they might address Latvian Prime Minister Valdis Dombrovskis in a confidential e-mail. To be sure, neither the former MEP nor his party wewre involved in it, but basically, one of the coalition parties, the People's Party (Tautas Partija/TP) has opted out of the letter it signed with international lenders.
That would be bad enough -- the TP prevented a bill proposing a tax on housing from being moved into the legislative process in the national parliament, the Saeima. So instead of voting on some kind of tax on residential properties, there will be no vote or parliamentary discussion, essentially reneging on the promises made to international lenders to implement such a tax.
But there is more. The TP has expelled, without any hearing, the Saeima deputy and party member Dzintars Ābiķis, who voted against blocking the bill from the legislative process. He didn't vote for raising taxes, he didn't vote in favor of the residential housing tax, he simple voted for letting the legislature discuss, amend and put to a vote a bill drafted in an effort to comply with international lenders.
The TP has also suggested that it wants to talk to the IMF and other lenders in what very much sounds like an attempt to renegotiate a done deal, putting forth their own terms (whatever they may be). To be sure, the international lenders' terms are harsh, they allow absolutely no spending of the loaned funds for economic stimulation (that is left to EU structural funds, which Latvia has CharlieFoxtrotted** so far). And oh yes, the TP has a bit more current voter support (around 1.7 %) than Stalin would get. Just the guys to talk on behalf of the Latvian people.
And yet that is not the end of the story. The government has drafted a budget that simply doesn't cut spending by the amount agreed with international lenders (by around LVL 271 million instead of the required LVL 500 million).
So what is happening? EU and IMF honchos are soon descending on Riga to ask the headline question in person. The opinion, already widespread earlier -- that the Latvian government is a bunch of untrustworthy, capricious fuckwits-- is crystallizing even more. And that means, we may not get the next tranche of international loans no matter what anyone does. I mean, when the signature of a major coalition party amounts to goatfuck a few months later...
Where do we go then? -- probably devalue the lat, print cash (could have been done earlier to spare everyone the agony of salary cuts and firings) and buy time through the winter, possibly with Dombrovskis being pushed out of office or resigning (getting off the tracks before the train hits). After that, with the TP zoonoids in charge, you can write your own black comedy...

* Russian-derived word for total chaos, literally, a honky-tonk whorehouse in chaos
** clusterfucked

State Labor Inspectorate puts hands in the EU cookie jar

The head of Latvia's State Labor Inspectorate, Rita Elce and five other officials have been suspended pending corruption investigations by the Bureau to Prevent and Combat Corruption (KNAB in Latvian).
The Labor Inspectorate head and staff members are suspected of using European Union (EU) social and regional program funds to hire fictitious employees (apparently real persons who never worked a day at the government agency but funneled almost all of their salaries to the bank accounts of the alleged conspirators).
Elce told journalists she would cooperate with the investigation and denied that she had benefitted from the diversion of EU and other public funds.
The "fiddle" with EU funds seems to have been an internal one for the enrichment of those involved, but its alleged existence raises suspicions that the agency could have been (and still be) open to bribe-taking to cover up illegal, unsafe and unethical labor practices and the use of black and gray market labor (illegal aliens, legal residents paid in envelopes).
Events such as this indicate that the KNAB is keeping its earlier promise of "we will come for you" with regard to corrupt public servants, but it does little to diminish the image of Latvia as a state where corruption, incompetence or both are endemic to the structures of public administration.

Analysts see collapse of trust in government

The Strategic Analysis Commission (Stratēģiska analīzes komisija/SAK), a kind of think tank that has been operating under the office of the President since 2004, presented a report (Latvian language, downloads from the link page) saying that trust in government institutions was extremely low and that around half of the population would be ready to engage in violent protest.

Roberts Ķīlis, a political scientist who heads the SAK, presented its findings to an extraordinary meeting of the Cabinet of Ministers (the government) called by President Valdis Zatlers to ask for an accounting of the reform process. The meeting, broadcast live by Latvian Television, lasted more that six hours and included heated exchanges between ministers, between the President and ministers, as well as statements (and outbursts) by third parties (representatives of unions and NGOs).

The findings of the report stated, among other things:

Latvian society is dominated by unprecedentedly low trust in both the government, the parliament, and, as surveys from the summer of 2009 show, also in the entire political and party system. Even though Latvia's inhabitants have never shown significant trust in their democratic representative institutions, the spring and summer of 2009 are illustrative of a permanent crisis of confidence. In this context, it is unlikely that it is possible to regain even a part of the lost trust in a few months time, In order to renew trust in the political system, it is essential to achieve a positive dynamic in the crisis (breaking a negative vicious circle).

The report goes on to say that there will be an inevitable new wave of emigration (both for economic reasons, and to seek social and political stability). This addresses the point I have earlier made in this blog, that emigration is not only a choice in favor of higher salaries (offset by a higher cost of living and sometimes, higher taxes that emigrants don't anticipate), but also a choice of governance. Emigration is also seen as a kind of final break of any loyalty to the Latvian state and society.

The report also points out that the municipal elections did not decrease what they called "social tension" and that voters, in effect, voted for politicians and parties they deeply mistrust. This is likely to continue or worsen as the national parliamentary elections of 2010 approach

On a positive note, the report concludes that Latvians are not yet ready to trade democratic freedoms for economic security. But on the economy, the SAK forecasts that recovery will not bring wages and living standards back to 2007 levels for at least five or six years -- by 2014 or 2015. This conforms my view, and that of blogger Edward Hugh, that what Latvia faces is essentially an "L" shaped recession. While Latvia stagnates, other European economies will recover and grow, drawing away skilled labor and professionals that would be needed even to make the slow and feeble recovery forecast by the SAK. After all, what kind of a recovery is it when you catch up with 2007 in 2014. Ironically, the "seven fat years" now look like seven pounds of flesh and seven years irretrievably cut from Latvia's development.

I would say the SAK report is more evidence of the main thesis of this blog -- that Latvia is a failed state lite.

The last days/weeks of Dombrovskis the fall guy?

Valdis Dombrovskis, like the summer weather in mid-September in Latvia, is on borrowed time. It is hard not to see and hear that the knives are out for him. Both his own coalition partner, the People’s Party (Tautas partija/TP), and the loyal opposition (no ministers, but hitherto behind the government) of Latvia’s First Party/Latvian Way (Latvijas pirmā partija/Latvijas ceļš LPP/LC) are shaking the coalition so hard that pieces are sure to fly off.

The LPP/LC said at a recent party leadership conference that they would not support Dombrovskis’ government. with Riga vice-mayor Ainārs Šlesers calling for the Prime Minister to step down in so many words.

Guess who will step up?

Not even a few months had passed since the June municipal elections put the twins Nils Ušakovs (of the pro-Russian Harmony Center/Saskaņas centrs/SC) and Šlesers in charge of the Latvian capital when the “alpha twin” Šlesers started talking of taking up the call to head a government after the 2010 elections. Now, it seems, the trumpet is sounding in his ears a bit earlier.

The People’s Party has been quarreling with Dombrovskis on economy policy and accusing the government (here one must agree with Latvia’s most unpopular party in voter polls) of poor communication both within the government and with the general public. It looks like they are ready to jump as well, but hoping that the 2010 elections will boost their ratings significantly beyond the present 1.5 to 1.7 % the TP has gotten in recent polls (one thinks that given the historical ignorance of some young people plus the spin that he is actually a nice guy from Purvciems could get Vjaceslav Molotov an higher rating than the TP).

The TP wants to draft “ businessman” and ordinary rank-and-file member Andris Šķēle to make a come-back as Prime Minister (unless he trips and falls under the Bulldozer -- one of Šlesers’ municipal election symbols). Interestingly, when asked what business Šķēle had been doing on a TV talk show, Vineta Muižniece, the TP parliamentary faction leader, said that it was a private matter for Šķēle.

Certainly, whatever it is he has been doing has gotten little publicity compared to other business figures, such as Mārtiņš Bondars, ex-chairman of Latvijas Krājbanka (The Latvian Savings Bank), who have hinted at entering politics. We can read the bank’s annual reports. We can look at the track records in private business of people such as Vitālijs Gavrilovs, who ran the brewery Aldaris for many years. Other than peripheral involvement in some windpower project and alleged involvement in the failed first attempt to start digital terrestrial television, I really don’t know what Škele has been doing as a businessman these past few years. Does anyone else?

I don’t believe the “Šķēle factor” will revive the TP, which is widely and accurately blamed for its blind and deaf belief that the “fat years” would continue forever. What is more worrisome is that if fall guy Dombrovskis falls, “pedal to the metal” Šlesers may step up to the Prime Minister’s chair even ahead of the 2010 elections (it is anybody’s guess what may happen to the economy and the social fabric of the country over the next year, but it won’t be anything good). The LPP/LC, to my mind, is a cryptofascist party backed by religious fanatics who have repeatedly attempted to restrict the free speech rights of sexual minorities in Latvia. The authoritarian mind set of these people may then treat other dissidents -- such as angry spontaneous demonstrators -- no differently.

Another sign that Dombrovskis has expended his usefulness is the fact that the ink is dry on a number of critical international lending agreements and the cash is rolling into Latvia’s state coffers. There is no need to have guys hanging around whose party leadership (Dombrovskis is from the New Era/Jaunais laiks/JL) pledged in church to be committed to clean and honest government (many saw this as a balagāns/cheap show, but maybe not the Main Man up there). The international loans (and the lenders will not have armed auditors standing next to every bureaucrat) are the biggest opportunity for corruption and state capture, dwarfing the infamous G-24 credits of the early 1990s, where mere tens of millions vanished down the rathole.

Knowing what a Charlie Foxtrot (cluster f**k) the Latvian government (any Latvian government) can be, there was a substantial risk that the whole international borrowing process could have been bungled, leaving Latvia at least temporarily insolvent. Better to have had Dombrovskis and the JL guys at the wheel for that. Since it didn’t happen, we can clear the bridge and put a real pirate crew on deck now that the ship didn’t sink.

However, that doesn’t change the fact that another LVL 500 million will have to be cut from the 2010 budget in the next few weeks, with equally much coming out of the 2011 budget. So even if he gets a premature shot at the Prime Minister’s chair, Šlesers will face some real challenges as well as likely social unrest and a noticeable bleed-off of the potential workforce as economies recover in countries that Latvians can easily emigrate to.

Latvia to borrow USD 800 million domestically by year end?

The Latvian government has promised international lenders to raise LVL 400 million (more than USD 800 million ) from "domestic sources" by the end of this year, according to a confidential document leaked to the national news agency LETA.

In addition to the document, it is understood that the Latvian State Treasury (Valsts Kase) has already drawn up a schedule of debt auctions and target yields.

With less than three months remaining in 2009, it appears that there will be frequent, high volume sales of treasury bills or other debt instruments, perhaps on a weekly basis, for the rest of the year.

The large volume of borrowing in a poor country of 2.2 million is likely to drain all liquidity from the money market unless foreign bank subsidiaries or other foreign investors come in as "domestic" bidders in the auctions.

It is likely that such heavy government borrowing will effectively squeeze out Latvian small businesses and private borrowers who are already complaining about banks being reluctant to lend. In addition, the squeeze is likely to boost domestic interest rates even further.

Since the largest Latvian financial institutions are Swedish owned, participation by Swedish subsidiary banks would increase the Swedish financial sector's already high and precarious exposure in Latvia and the other Baltic states. Although state debt is generally rated as very secure, there is an inevitable linkage between the huge Swedish exposure in mortgage and private lending and state finances. Large-scale defaults and renewed pressure on the Latvian currency could, in the future, lead to stop-loss selling of Latvian treasury bills.

The failure of a modest-sized treasury bill sale earlier this year led to turbulence on Scandinavian stockmarkets and intervention by the Bank of Latvia to support the lat.

The LVL 400 million domestic borrowing target also raises questions about the true size of Latvia's budget deficit, which was supposed to have been covered by loans from the European Union and the International Monetary Fund (IMF).

The confidential document also indicates that Latvia must work to restructure its existing debt stock to increase maturities and reduce the risk of rollover (in simple terms, borrowing from Peter to pay off Paul, then hitting up Paul again when Peter has to be paid back).

The document, which found its way to the Latvian news agency, is apparently very sensitive, with Finance Minister Einars Repše interrupting remarks by a member of the Latvian parliament, the Saeima, warning the man that he was about to disclose state secrets. The parliamentarian referred to provisions in the confidential document that "would be of great interest to financial speculators."

Finance Minister amazed by economic reality

The Latvian TV show Nekā personīga (Nothing Personal) showed the Minister of Finance Einārs Repše expressing surprise that total budget spending had not decreased despite sharp cuts in the basic state budget. The money, it turns out, was all being spent through the so-called social budget comprised of pension payments and unemployment benefits. The economic crisis and rising unemployment -- some of it fed by laid-off government and municipal employees -- was increasing demands on the social budget at the same time as lower wages and fewer employed are available to fund the social budget through so-called social contributions (another name for taxes).

"Surprisingly, and I was surprised by it too, our reduction in expenditure in the basic budget is almost precisely compensated by the increase in expenditure in the social budget. So the reduction and all that we have done with our combined efforts last year and this year has reduced the basic state budget, that is, the expenditures for state administration and related spending. But purely by chance, the social expenditures have grown by the same amount," Repše told the TV3 reporters.

What a surprise, especially for a Finance Minister one would expect to know a little economics! And didn't he say that that any downward spiral of tax revenues and rising social costs had been taken into account when making drastic budget cuts? So we only seem to have cut LVL 500 million and are back to square one. What else will surprise the Finance Minister next?

Teacher protests on the first day of school

Hundreds of Latvian teachers gathered in front of the Cabinet of Ministers building (The Government House) to "mourn" the degradation of Latvia education by drastic funding cuts and salary cuts. The peaceful protest came a day after several hundred demonstrators blocked bridges and roads outside Bauska, Latvia to protest the reorganization of the local hospital, eliminating, among other things, the maternity ward and most emergency services.

The Battle of Bauska -- just the start?

Several hundred people blocked two bridges in the town of Bauska, Latvia on August 31 to protest the reorganization of the local hospital and were dispersed by special riot police sent from Riga. Although emotions ran high and there was some pushing and shoving, there were no known injuries and four arrests, reportedly for public intoxication.

The action could, borrowing from Rage Against the Machine, and exaggerating somewhat, be called The Battle of Bauska, especially if it is the first taste of the social unrest that is being expected this fall. It may also have been a show of force by the government indicating that instead of dialog, it will back its hasty, seemingly chaotic and ill-explained so-called reforms and cutbacks with the riot squad where needed.

While the Bauska hospital is not being closed, it is shutting down maternity and in-patient services and reducing emergency services. Patients are being re-directed to hospitals in Jelgava, some distance away and elsewhere. This has especially distressed pregnant Bauska residents as well as those who fear the reduction of emergency assistance, not only for themselves, but for future victims of road accidents along a main north-south highway that runs through the town. It was in order to cause disruption and publicity along this main transit route that the highway and bridges were blocked in a largely spontaneous action that was guarded, but not dispersed by local police.

The health care system in Latvia is, undoubtedly, bloated and inefficient, but the present cutbacks are being made in a way that appears arbitrary and irrational, piling perceived threats of reduced health care on top on cuts in education, pensions and salaries for many public sector employees. The events in Bauska may well be precursors of more widespread socio-economic protest that may be beyond the capacity of Riga-based riot police to control.

Protests are unlikely to solve the fundamental problem -- the total destruction of trust in government/state authority and the de-facto lack of funding for a range of services, highlighted by health care. The government has largely dug its own pit (not to say grave, although there is talk of toppling the administration of Valdis Dombrovskis) by failing to explain its cutbacks and reforms and, in the case of health care, failing to prepare for a reduction in the number and functions of hospitals in Latvia. There is, for example, no nation-wide network of medical evacuation helicopters (only a few would be needed) nor is there subsidized or insurance-covered transport for patients making routine visits to hospitals and clinics from remote areas.

Latvian television (the evening news program Panorama) has posted some semi-edited raw video of the events in Bauska on YouTube.