By Patrick Lannin and Balazs Koranyi
RIGA (Reuters) - Latvia's prime minister said on Monday he was sure his country would get further loans to help fend off state bankruptcy and devaluation, but the head of the IMF expressed concern about the effect of planned budget cuts.
Latvia's woes have rattled markets in eastern Europe and Sweden due to fears of a devaluation, but these worries have receded and the lat currency has firmed. In a turnabout, the central bank last week sold lats and bought euros.
The finance minister warned that International Monetary Fund (IMF) and European Union (EU) loans depended on parliament approval for budget cuts to pensions and state salaries on Tuesday and warned deputies not to meddle with the finance bill.
"Of course we are working on getting this loan and I am sure that we will get it," Prime Minister Valdis Dombrovskis told public LTV television.
Latvia is expecting 1.2 billion euros in loans, including 1 billion euros from the EU, in late June or early July, part of a 7.5 billion euro rescue agreed with the IMF and EU in December.
To win the new funds and ride out an expected GDP drop of nearly 20 percent this year, Latvia has pledged to slash its budget by 500 million lats (614 million pounds), including cuts to pensions and public salaries.
"The IMF is especially concerned about the fact that the necessary measures which have to be undertaken to fix the important budget deficit should not hurt the poor, primarily," IMF chief Dominique Strauss-Kahn said on a visit to Kazakhstan.
Finance Minister Einars Repse issued a strong warning to parliament, saying he could not guarantee the loans, though he was optimistic of them if the budget was passed on Tuesday.
"If we do not accept some of these documents or change something to raise the deficit ... then, cheerio, we can immediately forget about any loan and we are left with our own resources," he said.
EASIER MARKET
He said even with the budget cuts the deficit could hit 11.6 percent of gross domestic product this year in the worst case.
Dombrovskis said the IMF was still looking at Latvia's new budget plans and would give its answer in the next day or so.
The crisis has led to speculation Latvia will have to devalue and end the peg of its lat currency to the euro.
After two weeks of tight liquidity, conditions in the market have eased as rising optimism about the new EU and IMF loans took the pressure off the lat. This allowed the central bank last week to buy 160 million euros and sell lats, improving market liquidity and bringing down overnight rates.
The lat was slightly weaker in late trade, with the euro quoted at 0.7005/25 lats after the 0.6963 lats close of Friday.
The central bank buys lats and sells euros when the euro reaches 0.7098 lats euros and sells lats at 0.6958 lats.
The benchmark overnight lending rate fell to 3.80/8.60 percent, from levels above 20 percent last week.
"All eyes are now on parliament and the budget vote. If it is approved, then there will be much less stress on the market, for at least two or three months. It's going to give time for the government," said one trader.
"If it's approved, short-term rates, of up to 3 months, will be coming down further but longer rates will stay quite high, those will not be coming down now."
Easing pressure on Latvian assets was also clear in credit default swap (CDS) prices as the spread on 5-year debt narrowed to 718.5 basis points on Monday from 725 bps on Friday while CDS prices for other nations in the region widened.
(Reporting by Patrick Lannin; Additional Reporting by Sabina Zawadzki; editing by Stephen Nisbet)
