Latvia, which is currently in an extremely tough situation, missed a payment from the IMF in March. In an interview in today's edition of the Latvian business daily Dienas Bizness the Latvian Prime Minister Valdis Dombrovskis said that the country did not get the expected EUR200m payment from the IMF that is part of the EUR7.5bn rescue package agreed upon just before the new year.
According to the Prime Minister, the IMF did not pay the Latvian government because the previous Latvian government failed to implement the agreed budget amendments. This is obviously bad news and clearly shows that the IMF is not willing just to pay out money to governments that do not come through on the obligations in terms of fiscal tightening.
Even though this is bad news, Mr Dombrovskis's comments today basically have to be seen as a rephrasing of what he had already warned about when he was appointed Prime Minister in March; that the Latvian government would be "bankrupt" in June if it failed to get the planned payments from the IMF. However, the fact remains that if the Latvian government fails to implement new fiscal measures very soon, there is a real risk that the Latvian government will go into default.
According to Mr Dombrovskis's earlier comments, the Latvian government now has just two months to implement significant fiscal tightening to ensure that the IMF will pay the next instalment; otherwise the consequence might very well be a default. In that respect, it should be noted that Mr Dombrovskis's fragile five-party coalition government will have to push through such austerity measures just prior to the local elections and European parliament elections planned for 6 June. To some extent Mr Dombrovskis's comments will have to be seen in a political context as he will want to make it a 100% clear to the coalition partners in the government that if extreme fiscal tightening is not passed very soon, the Latvian government will simply run out of money.
In June the Latvian government is supposed to get the next big payment as part of the IMF-led rescue package: around EUR1.7bn from the EU. We believe the EU might be a bit more "soft" than the IMF, but on the other hand the EU can not "just" pay if the government fails to implement fiscal reform.
Concluding, today's comments from Mr Dombrovskis, even though they are not totally "new", are nonetheless a reminder to the markets that the risk that Latvia could default on its debt obligations if the government fails to push through with strong fiscal reform very soon is real.
