Vad fan?! probably sums up what Sweden's Finance Minister Anders Borg feels about the situation in Latvia, where his country's banks have billions of SEK at risk if the economy is not stabilized and some signs of recovery shown. Essential to stabilizing the Latvian budget are huge international lines of credit that have been and will be paid out only when conditions agreed upon with the international lenders -- the European Union (EU) and International Monetary Fund (IMF) are met.
So far Latvia has blatantly ignored the terms of its most recent letter of intent with the lenders and, instead of cutting LVL 500 million (more than USD 1 billion from the 2010 budget), it has cut only LVL 225 million. Pushed by the People's Party (Tautas Partija/TP) -- which signed the letter of intent promising to tax residential real estate-- Latvia has backed off from even considering some kind of tax on residential housing and expelled the only parliamentary deputy who suggested that the matter be put to a legislative vote even if the TP was against it.
Valdis Dombrovskis, Latvia's prime minister and head of a shaky coalition, now claims that "political agreement" has been reached on the less harsh 2010 budget that actually breaks with the terms of the letters of intent Latvia has signed with its creditors. In other words, there is a very good chance that Latvia will not get any more loans for the simple reason that it ignores the terms and conditions on which this money is provided.
Sweden's finance minister has understood as much and has let both Swedish banks and the media know -- directly and indirectly -- that Latvia is on its way to possible if not likely state bankruptcy and economic collapse (once there is no more money for the state budget). The Latvian government, or rather the TP, which lives on a planet of its own, is ignoring these warnings and dragging out its Alice-in-Wonderland budget process in front of the whole world (which is, unknown to the TP, the planet that they are really on).
Latvia has already established a solid reputation of unreliability and vacillation -- if not something worse, summed up by an expression that circulated after a city councillor (who was cooperating with the police) took a bribe and then didn't vote how he was bribed to vote. It is " paņēma un uzmeta" -- "took the money and fucked us." The TP and other Latvian politicians apparently believe that this way of doing things can be exported to the international arena without any consequences.
To be sure, the terms Latvia agreed to with the international lenders are incredibly harsh and leave no room for measures to stimulate the economy. As implemented by the government, the budget cuts hitherto seem to be destroying the state-funded health care system, wrecking education (teachers are paid barely above the minimum wage), demoralizing the police (with drastic salary cuts) and reducing pensioners to absolute poverty.
On the other hand, the international lenders, including the IMF, didn't fly in with a ready and non-negotiable set of requirements, more likely, with a number of goals and targets that they asked the Latvian side to make proposals for meeting and assuming that the Latvian government could actually execute on these proposals and compromises. From the outset, the EU and IMF lenders never excluded, for example, devaluation of the LVL instead of an extremely harsh "internal devaluation" by reducing wages. Latvia was unbending and chose a policy that, many would argue, has sharply cut living standards (prices of many domestic essentials would not have risen sharply if the LVL was devalued, certainly not with the same effect as a 40 % cut in income).
Instead of formulating a policy that met the needs of both sides and sticking to it, the Latvian government has engaged in a balagāns (a cheap clown show) of political in fighting and signaling the international lenders that now that you have filled the trough (with the loan tranches paid hitherto), the pigs will play with their food as they please.
Sweden's finance minister doesn't go out and (even in a confidential meeting) scare Sweden's already hypernervous banks with warnings that Latvia will collapse unless there is a lot of substance to such a forecast. It now looks like Anders Borg is probably right and Latvia's creditors must do as American children in the 1950s when the atomic air raid warning went off -- they have to duck and cover.