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EU provides €3.1 billion Community financial assistance to Latvia

The first instalment of €1 billion should be released in March 2009.

Article created February 3, 2009

The EU financial assistance is part of package of international financial assistance to Latvia totalling up to €7.5 billion in the period to the first quarter of 2011. Assistance is being provided to meet liquidity constraints in the short term and support an orderly external adjustment in the medium term. Assistance requires addressing the worsening budgetary situation, restoring confidence in the banking sector, and bolstering the foreign reserves of the Bank of Latvia. 

The assistance comes after the ECOFIN Council decided on 20 January 2009 to provide balance of payments assistance of up to €3.1 billion to Latvia. A Memorandum of Understanding and a Loan Agreement, setting out the fiscal, financial sector and structural reform conditions attached to this assistance, were signed on 26 January 2009.

>> Memorandum of Understanding pdf (6 MB) Choose translations of the previous link 

International financial assistance and the Economic Stabilization Programme

Latvia has accumulated major imbalances in recent years as rapid expansion was fuelled by easy credit conditions and an expansionary fiscal stance. The situation has been greatly accentuated by the global financial market crisis. Latvian capital and financial markets came under significant pressure from October 2008 onwards, reflecting increased concerns about the sustainability of the country's economic and financial situation, imbalances accumulated over time and the general deterioration in market sentiment towards emerging markets. Particular concerns related to the health of the banking sector, and in particular to the viability of the country's largest domestically-owned bank (Parex). 

This prompted the Latvian authorities to turn to the EU, IMF and regional neighbours for financial assistance. The Community assistance is provided in conjunction with a loan from the International Monetary Fund of SDR 1.5 billion (1200% of Latvia's IMF quota, around €1.7 billion) under an IMF Stand-by arrangement approved on 23 December 2008. The Nordic countries (Sweden, Denmark, Finland, Norway and Estonia) are to contribute €1.9 billion together, the World Bank €0.4 billion, the European Bank of Reconstruction and Development, the Czech Republic and Poland a total of €0.4 billion, bringing the combined total to €7.5 billion over the period to the first quarter of 2011. The international financial assistance will underpin the implementation of the "Economic Stabilisation and Growth Revival Programme" adopted by the Latvian authorities on 12 December 2008.

On 20 January 2009 the ECOFIN Council took a Decision (5255/09) to support Community medium-term financial assistance for Latvia totalling €3.1 billion. The Memorandum of Understanding, signed on 26 January 2009 by the Prime Minister, the Minister of Finance, the Governor of the Bank of Latvia and the Chairwoman of the Financial and Capital Market Commission and on 28 January by Commissioner Almunia, sets out the fiscal, financial sector and structural reform conditions attached to this assistance. These include fiscal consolidation, measures to strengthen fiscal governance, financial sector regulation and supervision reforms, and structural reform measures supported in the context of the Lisbon strategy.

Following the signature of the Memorandum of Understanding and the Loan Agreement, it is expected that the first tranche of €1 billion will be released in March 2009. The Commission will borrow the necessary funds on the financial markets on behalf of the Community.