Latvia Races to Cut Deficit to Keep to Its Bailout Deal
RIGA, Latvia — Many countries in the world have felt the sting of the economic crisis, but few can match Latvia for sheer pain. A harrowing contraction in the economy is reordering expectations for the future as the country’s leaders grapple with a credit-fueled boom turned to bust.
Two brothers, Matiss and Oskars Barkoviskis, see it every day as they make their rounds here in their borrowed Mazda pickup truck. In the three months since they founded a charity for feeding the poor, they have discovered a strong and growing demand for their services.
In just that time, the number of families they visit each week has nearly doubled, with new ones answering ads in Riga’s free newspaper every day. They started by delivering groceries down the dirt roads outside Riga and into decrepit, Soviet-era high-rise apartment buildings. But now they find themselves helping out families who live in apparently comfortable surroundings, but who can no longer afford to feed themselves.
“Before we started this project, I never thought people could live like this,” said Matiss Barkoviskis, 20. “There is a sadness that I did not expect.”
It is not hard to grasp what stands behind the sour mood in Latvia. Forced into the arms of the International Monetary Fund, the Latvian government is now slashing its budget and the wages of state employees in a bid to rebalance a society that had run badly out of whack.
Austerity is rippling down the social hierarchy, as the affluent cancel vacations, middle-class people fret about social descent, and Dickensian scenes of destitution multiply.
In Riga, the capital, abandoned construction sites, vast lots of repossessed cars and a new, utterly empty shopping mall testify to the misery. But the government’s tough medicine for the crisis, stiffer than Black Balsam, the syrupy herbal liqueur that is the country’s national drink, has defined the times.
Latvia is racing to halve an enormous government budget deficit, now estimated at 12 percent of gross domestic product, even as its economy is expected to contract by 16.5 percent this year. That is a condition of the $10 billion bailout by the I.M.F. that the European Union, of which Latvia is a member, also supported.
Prime Minister Valdis Dombrovskis, acutely aware that the previous government fell after Riga was shaken by riots in January, must now convince wary lawmakers that the country’s choices have narrowed to bad and worse.
“There is a growing awareness of what the problems are, but also what the alternatives are,” Mr. Dombrovskis said in an interview. “The alternative is not receiving international financing.”
The alternative, in other words, is default.
In better times, the global financial system would barely flinch at the idea of Latvian insolvency. But the other Baltic countries, Estonia and Lithuania, as well as Romania and Bulgaria and even Western stalwarts like Ireland all gorged on cheap credit and are all groaning under a heavy debt load. The last thing they want to see is a default, which could reignite a crisis that appears to be easing.
“Latvia is a reminder that there are other countries struggling with huge imbalances, though nobody has turned out as bad as Latvia,” said Lars Christensen, chief analyst at Danske Bank in Copenhagen, who has long warned of a convulsion in the region. “Some come pretty close.”
In the heady days after it gained membership in the European Union in 2004, Latvia pegged its currency, the lat, to the euro in anticipation of eventually adopting the European currency. Its economy blossomed and Riga, blessed with its abundance of stunning Art Nouveau architecture, emerged as a kind of capital of the Baltics.
Euro-denominated lending exploded, to the point where 85 percent of household debt was held in euros. But that seemed immaterial at the time, since the euro would soon replace the lat as the country’s currency, or so it was thought.
The lat is still with Latvia, however, and so is a colossal problem of how to devalue the currency — the usual adjustment mechanism in a financial crisis — without creating a crushing debt burden. Rather than let the currency decline, the government has chosen what it calls an “internal devaluation,” in which wages are forced downward to restore the economy’s equilibrium.
In December, the previous government reduced wages by at least 15 percent for most civil servants, and Mr. Dombrovskis is promising more. The government’s procurement budget was cut by a quarter, while the value-added tax increased to 21 percent from 18 percent. Exceptions for books and hotels fell away; excise duties on alcohol and gasoline rose.
The experience is weakening the bonds that Latvians feel for their state. Though proud of their heritage in language and culture, many now speak openly of emigration, and fading memories of citizens standing together with leaders to throw off Soviet domination 19 years ago only accentuate the alienation.
“Independence or bondage is an easy question to answer,” said Krisjanis Karins, a former Latvian economy minister. “This time it is not so cut and dried.”
Girts, a lanky 40-year-old doctor’s assistant, works three jobs in three hospitals for a monthly salary of $1,350 and spends half his income servicing a euro-denominated mortgage on his apartment.
The mood at Latvia’s state-run hospitals, he said, is now one of foreboding, as employees gripe that managers did not share in the pain of a 20 percent wage cut in January — one that covered all government workers — and will dodge another later this year. “I have very little faith left in the Latvian state,” said Girts, who asked that his surname be withheld for fear of retribution by supervisors. “I don’t know how much longer this can go on.”
For Latvia’s poor, the mood falls somewhere between bewilderment and frustration, as families struggle to comprehend why their world has come apart.
It did not make them rich, but Latvia’s boom over the past few years reached Aija Voitov and her husband, Juris, who live in a two-room shack heated by a crude metal stove down a dirt road outside Riga.
Though Mr. Voitov switched jobs from time to time, work was plentiful, and Mrs. Voitov had only to walk over to the nearby main road to find work at a big supermarket. Three months ago, Mr. Voitov lost his job at a food processing factory where he had earned $735 a month, a tiny enough sum. Since then, as the family scrapes by on state assistance, Mrs. Voitov confesses little comprehension of exactly what went wrong, only that in the past, things were better.
“It was normal, it was good,” Mrs. Voitov said. “There was plenty of work.”