Danske: Mission Impossible for Repse in Latvia

Danske Bank out with its regular overview of "New Europe Weekly". This week Latvia is the key story, and the message is as follows:

While the global economy is showing tentative signs of improvement and some risk appetite has returned, Latvia’s economic woes have simply got worse. Hence, over the last couple of weeks speculation has increased that Latvia will not receive its June instalment on its IMF loan, as the IMF doesn’t believe that the Latvian government has fulfilled its obligations in the Standby agreement. In our view, if the IMF does not pay the June instalment, then Latvia would be pushed very close to a default.
According to Reuters, Latvian officials said this week that the 2009 budget gap will be 7% of GDP, even if it cuts spending by 40%! Furthermore, they suggested that social spending – for example pensions – would need to be cut. This looks like ‘Mission Impossible’ to us – bearing in mind that Latvia will have local and European Parliamentary elections on 6 June.
We cannot forecast whether or not the IMF will pay the instalment, but we are worried that if the funds are not forthcoming, then the Latvian government would have to cut public spending very dramatically in order to avoid a default.
We therefore conclude that this is ‘Mission Impossible’ for Latvian Finance Minister Einars Repse, and it appears that the credit agencies agree – earlier this week Moody’s cut Latvia’s credit rating two notches to Baa3 from Baa1.

Charts courtesy of Danske Bank, click to enlarge.Another tragedy looming?