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Latvia: Minority Government on action

Thu, Mar 18 2010, 14:35 GMT
by Violeta Klyviene

Danske Bank A/S  |  View company's profile

Details

Regarding the political situation in Latvia. There is no further newsflow regarding the political development in Latvia. Clear is that Latvia will have a minority government in power, which should not be necessarily taken as bad given that all.

Assessment and outlook

The austerity measures at least related to this year has been passed through the Parliament. That includes also the new budget law. Thus there is no risk on this issue. There is certain risk, that the People's Party (PP) together with the some other parties from the opposition could push through the Parliaments some populist bills - lower taxes or higher pensions or wages. Recently, the IMF pointed out this risk as well. According to IMF there is no chance for the government to move to any fiscal easing policy option.

Regarding the future prospects, Latvia has had many minority governments in the past, and often that was the case prior elections. We do not expect the collapse of the minority government at this moment given that only six months are left until the general election scheduled for October this year. PP party will probably remain in opposition as it would be relatively comfortable position for them ahead of the elections. The political instability is not expected to affect the IMF financial support plan since there is still some consensus among Latvian leaders. But toward the election date we might expect the opposition parties to come up with some new “rescue plan”, which are more favorable for the Latvian people but not in line with the IMF demands.

Market reaction to the government collapse has been relatively neutral and there has not been any spill-over into other CEE markets yet, but the risk is clearly on the upside, especially if the negative newsflows escalates. The tensions on the political scene will likely further rise ahead of the October’s elections. Obviously austerity measures implemented over the 2009 was very unpopular and many sections of the Latvian population have been hit by these measures, especially those with the lowest income level.

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Published on  Thu, Mar 18 2010, 14:39 GMT