By Balazs Koranyi
RIGA (Reuters) - Latvia's parliament is expected to approve severe spending cuts on Tuesday to save the European Union member's budget from collapse and unlock planned loans from Brussels and the International Monetary Fund.
Markets, in turmoil since early June over the chances of the small Baltic Sea state devaluing its currency, calmed ahead of the vote, which includes measures to cut public sector wages by 20 percent and pensions by 10 percent.
The government expects its majority in parliament to make sure the measures, worth 500 million lats (605.9 million pounds) in cuts to this year's budget, were passed. The head of the budget committee, an ally of the prime minister, stressed the measures were vital to secure further tranches of aid.
"(Without the steps) we will not get international financial help, but even greater difficulties," Guntis Berzins told parliament at the start of the session.
As well as the final budget bill, parliament is considering a string of other bills accompanying the budget. Politicians say it could take several hours before the budget vote is held.
"If Latvia finally passes these budget cuts, it gets the international bailout package without which it would be difficult to survive," said Violeta Klyviene, an analyst with Danske Bank.
"It will be really painful for people, but I think politicians understood this is the only way to save the economy, which could decline as much as 20 percent this year," she said.
Social tensions are expected to rise on the back of the harsh measures, just the latest blow for an economy that had boomed since joining the EU in 2004. Unions are planning a protest on June 18.
Teachers are among the most exposed to the cuts, with the education minister saying on Monday they faced salary cuts of 40 percent due to the new 20 percent cut, added to a previous reduction of the same size.
The country expects 1.2 billion euros (1.01 billion pounds), including 1 billion euros from the EU, in late June or early July as part of a 7.5 billion euro rescue agreed with the IMF and EU in December but halted pending the spending cuts.
Without the agreement, analysts say Latvia would risk insolvency and currency devaluation, which could shake other emerging European economies struggling with similar structural difficulties, as well as Swedish banks who are heavily invested in the region.
MARKET CALMS
Latvian markets continued to calm down after money market rates spiked last week as investors were pricing in a successful vote and looked ahead to the next step.
However, the CDS market remained nervy, with Latvian spreads widening a touch, to 724.6 from 723.8 late Monday. Spreads for Lithuania widened more sharply, to 498.6 from 487.5.
In Latvia, the lat was quoted at 0.700/10, a touch stronger compared to late Monday and in the middle of the currency's trading band. Dealers said there was no sign of any intervention by the central bank.
Dealers quoted overnight rates at 1.00/5.00 percent, down from 3.80/8.60 percent on Monday and from levels above 20 percent late last week as the central bank's sale of lats last week for euros created abundant liquidity on the market.
"The budget vote today is an important step but not for markets," another dealer said. "Markets are now looking for the next tranche of the IMF/EU loan; news on that could move this market but not really the vote."
(editing by Patrick Graham)
