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182 Economic crisis, health systems and health in Europe: country experience
These developments inevitably had a significant impact on public finances,
with the budget deficit widening from 0.4% of GDP in 2007 to 4.2% in 2008
(Table 6.1, Central Statistical Bureau of Latvia, 2013). General government
gross debt, which used to be one of the lowest in Europe, at only 9% of GDP
in 2007 (Eurostat, 2013a), increased to almost 20% of GDP in 2008, and
to over 42% of GDP in 2011; yet it still remained well below the average
for the EU27 of over 80% of GDP (Eurostat, 2013a). GDP contracted by
10.5% in the last quarter of 2008 (Cochrane, 2009) and at the end of February
2009, Standard & Poor's lowered Latvia's credit rating to BB+, one level below
investment grade, as the country faced bankruptcy if budget spending was not
cut (Cochrane, 2009). Long-term interest rates on government bonds doubled
between 2008 and 2009 (Table 6.1).
1.2 Government responses to the crisis
In late 2008, Latvia applied for financial assistance from international lenders.
The agreed programme was centred on maintaining the currency peg in order
to create conditions for accession to European Economic and Monetary Union
in the medium term (the authorities had initially aimed to join in 2008 but
high inflation forced them to drop this goal) (Economist Intelligence Unit,
2009). A total of €7.5 billion was made available between the end of 2008
and the first quarter of 2011, including a stand-by loan of around €1.7 billion
from the IMF approved on 23 December 2008. The balance was provided
mainly by the EU (a medium-term loan of up to €3.1 billion, with a maximum
average maturity of seven years, agreed in early 2009), Scandinavian countries
and the World Bank. As a precondition to the loan, the government pledged
to implement significant restructuring measures in the Economic Stabilization
and Growth Revival Programme. 2 The key features of this Programme, adopted
by the Latvian authorities on 12 December 2008 (Cabinet of Ministers, 2008),
included:
• stringent and stable monetary policy: fixing a peg rate for the Latvian lat to
the euro;
• stringent fiscal policy: balancing of state and local government expenditure
with their revenues (e.g. setting the upper limit for the state budget deficit
at below 5.0% of GDP in 2009, 4.8% of GDP in 2010 and 2.8% of GDP
in 2011);
• reducing salaries of public sector workers;
• reducing the number of public administration employees by at least 15%
within two years;
2 These conditions were listed in the Letter of Intent signed with the IMF and the MoU signed with the European
Community.