The Latvian government and the International Monetary Fund (IMF) on December 8 reached their first agreement in talks about an economic aid package for the Baltic state, Deutsche Presse-Agentur (dpa) reported citing local news reports. Both sides agreed that the Latvian budget deficit next year would not be allowed to exceed five percent of the gross domestic product (GDP), said Andris Miglavs, an advisor to Latvian Finance Minister Atis Slakteris.

The total budget deficit that we calculate at a five percent GDP drop could be close to 1.5 billion lats (USD 2.7 billion). It is a huge amount, and it means reduction of a very large portion of expenditures that we previously took for granted,” Slakteris said. Latvia’s negotiations with the IMF were still continuing and further details were expected to be released shortly. On December 7, IMF mission chief Christoph Rosenberg issued a statement saying good progress had been made.

“In cooperation with the European Commission, some individual European governments, and regional and other multilateral institutions, we are working with the authorities on the design of a programme that maintains Latvia’s current exchange rate parity and band,” Rosenberg said. “This will require agreement on exceptionally strong domestic adjustment policies and sizeable external financing, as well as broad political consensus in Latvia,” he added. Sweden was tipped to be on the list of possible lenders, according to Latvian media reports.

Two of the three largest banks in Latvia, Swedbank and SEB, are Swedish, and Swedish companies have been among the most active investors in Latvia ever since the Baltic state regained its independence from the Soviet Union in 1991. The second-largest bank, Parex, has already been nationalised by the Latvian government in a bid to stabilise the financial system. On December 8 a new management board took control of the bank, headed by Nils Melngailis, a former executive director of communications company Lattelecom. Melngailis also represents US investment group Blackstone in the Baltic region but told dpa that he would be devoting all his energies to Parex from now on.