Latvia goes the way of Iceland

February 21, 2009
Latvia's Government Falls on Economic Toll
By DAVID L. STERN

KIEV, Ukraine Latvia's center-right coalition government collapsed Friday, a victim of the country's growing economic and political turmoil. It was the second European government, after Iceland, to disintegrate because of the international financial crisis.

The government in Riga, faced with forecasts of a severe drop in the economy this year, was the first in Eastern Europe to succumb to turmoil caused by the crisis. Its collapse rounded out a week in which worries about feeble investment and output and shaky banks in Central and Eastern Europe coursed through international markets.

Latvia has had a history of revolving-door politics and complex coalitions since pulling free of the Soviet Union in 1991. Prime Minister Ivars Godmanis, who presented his resignation to President Valdis Zatlers on Friday, had been in power only since December 2007. But the precipitous plunge of Latvia's economy, which helped provoke riots last month that were the country's worst since 1991, played a major part in the government's downfall.

Mr. Godmanis said he would continue to govern until a new coalition was formed.

His departure comes at a critical juncture for Latvia, a country of 2.2 million people. After entering the European Union in 2004, Latvia and its neighbors Estonia and Lithuania posted Europe's highest growth figures, earning the moniker the Baltic Tigers. Now Latvia shows the Continent's biggest losses.

Gross domestic product shrank at an annual rate of 10.5 percent last month, and by the end of 2009, Latvia's economy is projected to shrink by a shocking 12 percent, Finance Ministry officials say. Other analysts believe that even these figures may be optimistic.

"I wouldn't be surprised if it's 15 percent," Peteris Strautins, chief economist for Swedbank in Riga, said last week.

The crisis led the government last fall to secure an aid package worth nearly $10 billion from the European Union, the International Monetary Fund and other sources. It came with strict conditions, and now the government is cutting spending wherever it can. Hospitals and schools throughout the country are under threat of closing, as local administrations find their budgets reduced by as much as 40 percent. Government salaries have been cut by 25 percent.