A number of member states have received direct financial assistance through balance of payments support (Hungary, Rumania, Latvia), bilateral agreements/IMF (Greece), the temporary emergency funds/IMF (Ireland, Portugal, Greece), and the permanent emergency fund (Spain and Cyprus).
Several member states have (also) indirectly benefited through the Securities Markets Programme (SMP) created in May 2010, a bond-buying programme of the European Central Bank that was replaced in September 2012 by the Outright Monetary Transactions (OMT) programme (Greece, Ireland, Portugal, Italy, Spain).
If relevant, describe the political, economic and legal situation leading up to the moment of the formal request of direct financial assistance.
A summary of the situation leading up to the necessity of financial assistance is given by Pleps and Balodis in ‘Financial Crisis and the Constitution of Latvia’. In short they argued that: After accession to the EU rapid economic growth based on private consumption took place in Latvia. Most of the money often taken in the form of bank loans was invested in non-exportable goods. This all led to high inflation. In the short term this situation provided for increases in tax revenues, thus, expanding the budget expenditure accordingly. The first warnings concerning an approaching crisis could be heard already in 2007. In 2008 the official indicators also showed that a crisis was approaching. Due to the global financial crisis and downgrading of Latvia’s credit rating, the availability of external financial resources collapsed at the end of 2008. At the end of the year the inflation was still at a rate of 15.6%.
In late 2008 the Government took over the Parex bank which was in fact insolvent – this Government decision strongly influenced the state financial situation and has had long-term effects. The Parex Bank according to its assets was the second biggest bank in Latvia (its assets constituted 13.8% of all assets of Latvian banking sector). The decision to take over the Parex Bank was taken by the Government after the Financial and Capital Market Commission (FCMC), the Ministry of Finance and the Bank of Latvia concluded that without state support the bank faced immediate isolvency threat.
On 18 December 2008 the Parliament adopted the law on Bank Takeover. This law allowed bank takeover in exceptional cases with the case of Parex Bank in mind.
On the same day, 18 December 2008, Latvia submitted a letter of intent to the IMF in which it stated that it wished to receive an international loan and promised to limit its budget expenditure, as well as to implement a series of political and structural reforms. An interesting fact is that these promises had not been reviewed or approved by the Parliament.
Already during the Parliamentary debates on 8 May 2008 the MPs expressed worries that the budget fails to comply with the original predictions and according to the plan, the growth has decreased from 7.5 to 5.5% and the inflation has grown from 6.3 to 15%.
On 4 June 2008 after the request of 34 MPs the Parliament decided on the draft decision on the tasks for the Cabinet of Ministers to overcome the economic crisis. The draft decision provided that the Cabinet of Ministers has to submit to the Parliament before 1 July 2008 a detailed report concerning fulfilment of the Law on the State Budget for 2008 during the first five months and an action plan for reducing the influence of the inflation on less socially protected groups of the society. A task was given to the Government to convene an emergency Parliamentary session where it had to report on the planned actions for overcoming the economic crisis before 10 July 2008.
The 2009 budget was adopted but evaluated by the MPs as an ‘illusion’. It was argued that it has been based on unfounded optimistic forecasts.
On 4 December 2008 an emergency parliamentary meeting convened by the Prime Minister Ivars Godmanis took place concerning the financial situation in Latvia. In this meeting I. Godmanis reported on the draft agreement the Government was discussing with the IMF and explained the situation with the takeover of the Parex Bank. He stated that Latvia was 44% behind from the planned revenues. He stressed that the Government was ready to implement cuts but was not ready to change the fact that the Latvian currency Lats (LVL) is pegged to the euro (EUR) because in the Monetary Programme of Latvia it was written that the Bank of Latvia ensures that LVL is pegged to EUR (1 EUR – 0.70284 LVL) with the possible fluctuation within 1% limit.
During the crisis Euroskepticism grew as well. For example, V. Lācis (MP not associated with any political faction, after having been elected from the NA list ) on 4 December 2008 expressed the opinion that joining the EU was the reason behind this crisis. “The EU is the one determining the economics and the EU politicians with their liberal approach have gotten completely lost. Liberal capitalism is dead,” he argued. He stated that “of course if in one area of the country the subsidies are seven times bigger, then the other area will go bankrupt. Our agriculture is destroyed with the help of unreasonable payments for farmers in other countries.”
MP K. Šadurskis (opposition, PS) argued that, “if when the unrealistic budget was adopted it was impossible to explain to the Government how silly it is to adopt unrealistic revenue forecasts and to allocate non-existing money, then the IMF managed to explain this in one moment. […] Now the Government for its expensive life has to pay with part of state sovereignty.” He expressed a belief that the Government under the IMF supervision will work better.
Another MP, A. Štokenbers (not associated with any political fraction, after having been elected from the TP list=) emphasized the paradox that the Prime Minister when talking about the economic stabilization plan expressed an opinion that the Parliament should not be burdened with this problem, while in every other country where at the moment economic stabilization takes place, the Parliament is the one deciding on it. He insisted that strong Parliamentary control is necessary in these circumstances.
On 4 December 2008, before the agreements on international assistance were concluded, the Finance Minister (A. Slakteris) reported to the Parliament that after talking to the IMF he has found out that a scenario similar to Argentina was considered for Latvia (devaluation). The Government disagreed with this as well as the Bank of Latvia but the only alternative was reduction in expenditure. He promised that this will very soon be presented before the Parliament. “Our own vision” the Finance Minister reported “on how to get out of this critical situation will serve as a basis for whether the international community as represented by the European Commission and the IMF will be ready to lend us the money.” He insisted that Latvia needs this loan in order to avoid a situation where the state expenditure would have to be reduced so heavily that the state would in fact have to stop functioning. He stated that “We will have to greatly reduce expenditure and increase revenues, in part by increasing taxes. These will not be popular decisions but otherwise we can end up in a country which cannot pay wages and pensions.” He expressed a hope that both Government and opposition will be capable of making these decisions that will not be easy.
In the same session the Prime Minister (I. Godmanis) insisted that the Government still controls the situation – financially, economically, structurally and legally. However, the programme for receiving financial aid is bilateral and that was the reason why it was not fully reported to the Parliament. The Programme is coordinated with the European Commission, the IMF and possibly with other participants. The document has not been coordinated yet. He asked the Parliament to vote for the Stabilization programme (which basically was the content of the letter of intent) but the draft agreement with the international lenders was not fully disclosed to the Parliament. The Parliament voted on the Stabilisation and Growth Recovery Programme (presented before the Parliament in the form of amendments to various laws on 11 December 2008) together with amendments to 2009 Budget. The Parliament hence got a limited information concerning the Government plans (the stabilization programme) but, since the draft agreement with the international lenders was not fully disclosed as well as the letter of intent one could argue that the Government made the political promises to receive the loan mostly on its own with a very limited involvement of the Parliament (please see more information on the stabilisation programme under Question X.2). Besides, the Parliament did not vote on the authorization for the Government to borrow per se, only on the intention to stabilize the state economy by carrying out various reforms as stated in the stabilisation programme. The Stabilisation Programme does not mention the Government’s plans to borrow money in any way.
Describe the public and political debate during the negotiations on the financial assistance instruments, notably the Memorandum of Understanding (MoU) and Financial Assistance Facility Agreement, in particular in relation to the implications for (budgetary) sovereignty, constitutional law, socio-economic fundamental rights, and the budgetary process.
The financial assistance instruments were generally decided among the Government and international lenders. The Parliament was not directly involved in the negotiations. The negotiations between the Government and the lenders (European Commission, the IMF, the Nordic countries etc.) were not public and the information concerning these negotiations is not publicly available. Since Government was the one fully deciding on whether or not to take a loan, there were initially no debates in the Parliament.
In December 2008 the Government adopted The Economic Stabilisation and Growth Restoration Programme. This stabilization plan provided that the office positions in the public sector will be reduced by 15%, the wages will be coordinated with the actual situation in the labour market and the euro will be introduced before 2012. Also changes in the 2009 budget were approved. The Plan forecasted the nominal debt in amount of 5 billion and provided that the Finance Minister can give guarantees on behalf of the state in 2009 in the amount of 229 331 463 Lats (LVL) (~ 328 286 154 EUR).
This programme in the form of amendments to various laws (2009 Budget Law etc.) was presented before the Parliament on 11 December 2008.
The Prime Minister (I. Godmanis) before the Parliament stated that he had coordinated this programme consisting of proposals for amendments and changes in various laws with ministries, institutions and, importantly, international financial institutions. Concerning concrete proposals he argued that the reduction in public sector wages cannot be discussed because it has been determined and supported by the international institutions. At the time he stated that the Government will maybe borrow, if its request for a loan is accepted. He said that the Government is not against including other institutions like the Bank of Latvia and State Audit Office in controlling how the borrowed means will be used. This programme is a precondition for possibly receiving the help in the future.
The Finance Minister (A. Slakteris) invited the Parliament to support the stabilisation programme. He reported that the Government is talking with the representatives from the international finance institutions.
S. Kalniete (opposition, PS) stated that her faction will support this programme not out of loyalty to the Government but because this vote will determine whether Latvia in a couple of months will still be solvent and thus will exist at all. She insisted that this Government has to be changed because dealing with the money which Latvia will receive from the IMF, European Commission and Nordic countries cannot be entrusted to it. She stated that she will vote in favour only because this programme is not created by the Government but by experts from international institutions.
A. Pabriks (opposition, Sabiedrība citai politikai) stated that his faction cannot accept such stabilization agreement because it is not created through solidarity and will not solve economic problems in a just way and will not affect all citizens equally. He insisted that in order to overcome the economic crisis, there is a need to first overcome political crisis.
V. Agešins (opposition, SC) stated that his faction supports the request for help to the IMF and other potential donors because it is clear that without outside help Latvia will not survive. However, they insisted that the Government has to be changed.
After lengthy discussions the Parliament voted in favour of the programme. Since the approval of the programme happened in the form of voting for amendments to various and numerous laws, it is not really possible to indicate all the votings results and majorities in detail. However, in general, the coalition members (LPP/LC, TP, ZZS, TB/LNNK) all supported the programme, as well as some members of the opposition.
In late 2008 the Government voted on accepting an international loan. On 18 December 2008 Latvia sent a Letter of Intent addressed to the IMF. The Letter stated that the Government has developed a strategy to counter financial pressures in the near term and requested that the IMF would support the proposed programme through a 27-month Stand-By Arrangement in the amount equivalent to SDR 1.521626 billion (1,200.02 per cent of quota or €1.7 billion) covering the period December 2008 to March 2011.
The main objectives of the programme proposed by the Government and as outlined in the Letter of Intent were to stem immediate liquidity pressures, to restore long-term stability by strengthening the banking sector, correcting fiscal imbalances and adopting domestic policies that will improve competitiveness while maintaining a fixed (narrow-band) exchange rate, and to strengthen the long-term structural performance of our economy.
On 7 December 2008 the IMF stated that “[…] good progress has been made towards a possible Fund-supported program for the country. 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 program that maintains Latvia’s current exchange rate parity and band. This will require agreement on exceptionally strong domestic adjustment policies and sizeable external financing, as well as broad political consensus in Latvia. In this context we welcome the commitment made today by the Latvian authorities. All participants are working to bring these program discussions to a rapid conclusion.”
On 19 December 2008 the IMF announced the Staff-Level Agreement with Latvia on a €1.7 Billion Stand-By Arrangement as Part of Coordinated Financial Support.
The Council decision from 20 January 2009 (2009/289, 2009/290 amended by 2009/592) made available to Latvia medium-term financial assistance of up to EUR 3.1 billion, with a maximum average maturity of seven years. Community assistance was provided in conjunction with a loan from the IMF of SDR 1.5 billion under an IMF stand-by arrangement approved on 23 December 2008. The Nordic countries (Sweden, Denmark, Finland, Norway and Estonia) were to contribute EUR 1.9 billion, the World Bank – EUR 0.4 billion, the EBRD, the Czech Republic and Poland – EUR 0.4 billion.
Since the materials regarding talks of the Government with the international lenders and as well minutes of the Government meetings considering negotiations of the international financial assistance instruments are not publically available, information concerning the Government’s position is scarce. Moreover, the Parliament was involved in the negotiations post-factum and therefore did not directly participate in them. This leads to a situation where the political debates happening at the time have been left unclear.
On 9 September 2009 already after the conclusion of the financial assistance instruments and the change of the Government from one led by Ivars Godmanis to the one led by Valdis Dombrovskis the new Finance Minister (E. Repše) reported before the Parliament on spending of the received loans. He reported that “as a basis for the loan agreement served the promise approved by the Government to reduce the deficit, carry out structural reforms, increase competitiveness, create new workplaces and facilitate export.” He argued that the requests by international lenders coincided with the interests of Latvia. The international agreement signed by two Governments (the Government led by the Prime Minister I. Godmanis signed the first Letter of Intent to the IMF and first MoU and the Government led by Prime Minister V. Dombrovskis signed the second Letter of Intent and the Supplemental MoU) is essentially with the IMF and the European Commission. He continued that the decision to solve problems connected with competitiveness is included as well in the Supplemented Economic Stabilisation and Growth Recovery Programme which was approved by the Parliament in late 2008 (presented before the Parliament in the form of amendments to various laws on 11 December 2008) together with amendments to 2009 Budget. He stressed that each expense is in compliance with the state budget and other regulations and no expenditure can be carried out by circumventing the Cabinet of Ministers, the Parliament or the order provided by law.
V. Muižniece (opposition, TP) on 9 September 2009 commented on the way in which the issues where solved during the borrowing process. The political parties of the coalition all signed the 2nd Letter of Intent addressed to the IMF. She argued that this, however, happened without any discussions, any evaluation, in a very rushed way and almost through blackmail. “The Prime Minister Valdis Dombrovskis on 27 July invited us to sign the letter within one day without sufficient introduction and consideration of its content, he argued. The reason behind him mentioning this was that the IMF was having a meeting in which a part of the loan would be decided upon. Later it turned out that such meeting took place a month later.” She stated that the TP supports the necessity of loans but cannot support the way in which the Prime Minister and the Finance Minister acted in this situation. The Government at the same time is exaggerating the IMF requests concerning tax reforms.
On 12 March 2009 Prime Minister Valdis Dombrovskis in the session on the confidence vote for the new Government stated that fiscal stabilization measures within the international lending programme are very painful. However, he argued, “if we will stabilize the state budget, we will receive the next financial assistance package.” He claimed that the doubts concerning the factual financial independence can be cleared up only by skilful use of borrowed means and by continuing the restriction of the budget. “This will allow to overcome the crisis without losing the foundations of the economic and social system by strengthening the democracy and improving the efficiency of government.” He asked once more to evaluate the benefits of being in the EU and stated that Latvia needs to aim to join the Eurozone as soon as possible because the united currency will provide for a stable basis for economic recovery.
J. Sokolovskis (opposition, PCTVL) emphasized the fact that the Parliament was considering the Letter of Intent containing measures which have to be approved by Parliament after the document had already been signed by the Government a long time ago. He asked whether it should not have been debated in the Parliament before it was signed rather than simply confronting the Parliament with it as an accomplished fact.
To this last question the Finance Minister answered that such documents can contain sensitive information which cannot reach the hands of market participants and that because of this some parts were taken out of the published version. He claimed that making this information publicly available would have endangered the financial interests of Latvia. Also, the Prime Minister rejected accusations concerning lack of transparency in the process of negotiations with the international lenders by referring to the practice of the previous Government where the information also became (partly) available only after the Government had signed the first Letter of Intent and the MoU.
What is the status of the financial assistance instruments in the national legal order (political agreement, international treaty, etc.)?
There have been only few discussions in this regard (please see some opinions under Question X.4).
At least from the way how it was dealt with in Latvia the Letter of Intent and its following reviews were never allocated any official status and most likely can be considered to be simply publicly expressed commitments by the Government.
The MoU and its supplements might be considered to be inter-governmental international treaties. If this is the case, since they have been concluded by the Government and have not been directly approved or ratified by the Parliament, in the hierarchy of the normative acts they stand below ordinary laws or international agreements (which would have been ratified by the Parliament) but above Regulations of the Cabinet of Ministers.
If the MoU and its supplements would be considered part of EU law (there has not been any discussion in this regard in Latvia), they would have supremacy over national law. Article 15(4) Administrative Procedure Law provides that the legal norms of the European Union (Community) shall be applied in accordance with their place in the hierarchy of legal force of external regulatory enactments. The case law of the Court of Justice of the European Union has to be taken into account (e.g. direct effect, supremacy).
The Parliament theoretically could have rejected the measures promised both in Letters of Intent and the MoUs once they were brought before it in the form of proposals for changes and amendments of law. However, since in practice this would have had grave political and economic consequences, such as not receiving next instalments of financial assistance, the Parliament felt strong pressure to support the austerity measures. Moreover, Government (representing coalition) had agreed to them, so especially in cases where a simple majority rule applied in Parliament there were no problems in finding the support within the Parliament. To implement the requirements of MoUs a simple majority was usually enough since no Constitutional changes were required.
Transposition national legal order
Considering the status of the financial assistance instruments, what procedure does the constitution prescribe for their adoption/transposition into the national legal order?
The Constitution does not prescribe any special procedure for transposition of financial assistance instruments in the national legal order. It is not fully clear whether the financial assistance instruments had to be regarded as international treaties, and, thus, should have gone through ratification by the Parliament. In fact, they did not, therefore in practice they were treated more like inter-governmental treaties which as opposed to international treaties can be concluded by the Government in the realm of its competences on its own and without the involvement of the Parliament. However, there was some discussion on whether this was correct.
For example, the authors of the research ‘Analytical work about international contract law and their interaction with the rights of the EU and its member state’ came to a conclusion that neither Letter of Intent nor the MoU are international treaties and therefore they do not create legally binding commitments for Latvia.
On the other hand, M. Lejnieks has argued that the letters of intent and the following loan agreements or decisions to issue credit, even if they are publicly being declared as not connected, one-sided acts, should be looked at as united transactions, international treaties, which touch upon questions normally decided by the legislature.
At the time when Latvia decided on the financial assistance the regulations on receiving international financial assistance were as follows. The Law on Budget and Financial Management provided that the Finance Minister on behalf of the state can take loans within the allowed limits in the annual budget law. Also he could take loans for covering the state budgetary deficit and re-financing of the state debts as well as for other objectives, if they have been established by the annual budget law (Article 35(1)). For the sake of economy and efficiency, the Minister for Finance could select the lender, the type of borrowing and the currency (Article 35(1)). The yearly budget stated the limits to the allowed actions by the Government in case of unforeseen circumstances (Article 35(3)).
After the international loans were already received, the procedure has been changed (partly due to the judgment by the Constitutional court in case No 2009-43-01 – see Question X.8). The new procedure provides that the Minister of Finance may borrow in the name of the State an amount which during the financial year exceeds 20% from the amount of GDP specified in the annual State Budget Law in the financial year only after the Prime Minister or Minister for Finance has presented a report regarding the relevant plans to borrow before the Parliament and a law authorizing such a loan has been adopted and has come into force (Article 35(21) The Law on Budget and Financial Management). Equal conditions apply as well if the conditions of the intended loan can be recognised as an “important and significant matter for the life of the State and society” and which concerns the implementation of tax policy, social protection system or other matters that have to be solved by amending legislation, even if the intended loan does not exceed 20% of GDP. The necessity of the loan has to be well-motivated in a report regarding the relevant loan, submitted by the Prime Minister or the Minister of Finance. The report must state the amount, purpose of use, time period and repayment schedule thereof, as well as intended measures of the Government for fulfilment of the conditions of the borrowing and repayment thereof shall be indicated (Article 35(22)).
Upon the request by the Cabinet of Ministers on 18 January 2010 the President’s Commission of Constitutional Rights issued an opinion “On the Necessity of Parliamentary Approval for Receipt of Large-scale Loans (Opinion)”. This Opinion together with the judgment of the Constitutional Court triggered the amendments of the law mentioned above. One of the reasons behind the Opinion was the doubts about the legitimacy of already received loans after the Constitutional Court’s judgment.
The Opinion states that it does not classify legally whether the agreements were international treaties in the sense of Article 68 Constitution, however, it shortly gives the answer for the hypothetical situation that the agreements were to be classified as international agreements in this sense. This seems to indirectly indicate that there is a good possibility that the agreements might have to be classified as international treaties from the perspective of the Latvian legal system.
The Committee based its Opinion on the “Significance theory”. First, it stated that an undertaking of international credit-commitments in accordance with Article 61 Constitution can be within the competence of the Cabinet of Ministers, if the Constitution, general principles, laws, international and EU law do not take this question out of its competences. The Opinion provides that the question can be ‘taken out’ of Government’s competences in accordance with the Significance theory, which provides that the most important state and society issues have to be decided by the legislator in accordance with the order determined by the Constitution. Also the Parliament, independently of this theory, at any time can take over any question concerning state politics in the realm of its competences. If the Parliament has not done so, then because of the problem of certainty and predictability peculiar to the Significance theory, the previous actions by the Government cannot automatically be considered unlawful because then the principle of legal certainty would not be sufficiently taken into account.
The Opinion states that the Parliamentary approval (including retroactive authorization ex tunc) is necessary for international loans that essentially and in the long-term affect the economic situation of Latvia. The Significance theory does not per se establish the necessary form for solving this question.
In sum, the Opinion argued that the financial assistance instruments required an approval by the Parliament but the form of such approval was irrelevant. In this case the fact that coalition and opposition partners on 10 December 2008 signed an agreement on measures for dealing with crisis was considered to be crucial. Paragraph 2 of this agreement provided that it is necessary for Latvia to borrow additional financial means from international institutions. The Opinion argued that, even though this agreement was not a formal political decision, it expressed the political will of the majority. Further, on the basis of this agreement an independent Council on Supervision of Financial and Economic Stabilisation Process was established. This Council whose tasks were carried out by the Parliamentary Committee of Public expenses and revision represented the interests of the Parliament every step of the way. It supervised the dealing with the borrowed means. However, this was not considered to be fully sufficient and, according to the Opinion, the Parliament should adopt a special decision or law accepting the previous actions of the Cabinet of Ministers.
The opinion concluded that, if these instruments were international treaties in the sense of Article 68 Constitution, then the approval by the Parliament was needed in the form of law.
Following the Opinion, on 21 January 2010, the Parliament voted on “The Task for the Cabinet of Ministers to borrow financial means in the framework of the international financial assistance programme”. The main discussions were as follows:
– Dz. Zaķis (MP, JL, coalition): He argued that the Constitutional Court judgment (the pension case, see Question X.9) determines two main things: first, Latvia must immediately pay the deterred pensions and, second, parliamentary authorization is needed for the actions of the Government concerning the loans from the IMF, EU and other donors. He invited the MPs to support the draft decision.
– V. Dombrovskis (Prime Minister): He stressed that this is a general (framework) decision about whether or not to continue the programme of international financial assistance. He stated: “[…] the Constitutional Court in its judgment has stated that a decision concerning international loans of such extent which create essential impact on [state] economy, a general [framework] Parliamentary support is necessary. The prepared draft decision entrusts such a task to the Cabinet of Ministers – to continue the programme of international financial assiatnce. I believe that this is really a very important and decisive moment and therefore I ask all MPs to support this decision.” He further argued that there were diverse opinions among the lawyers concerning whether such general decision authorizes the Government to sign the concrete documents, among them the third letter to the IMF and supplementary memorandum with the European Commission. In order to avoid such discussion as well a report from the Minister of Finance regarding these documents will be provided. He stressed as well the importance of the Opinion from the Constitutional Rights Committee which stated that decisive is the will of the Parliament and not the form of expression. Because of that he argued that the discussion about whether to choose the form of law or a decision is artificial and the decisive element is the will of the Parliament.
– V. Muižniece (MP, TP, coalition). She argued: “It is important to maintain the task that was given to us not by some monetary fund, not by some Government decision, but [the one] given by the Constitution –parliamentary control over all tasks exercised by the Government and clear authorization and tasks given by Parliament”. She stated that the TP could not support this decision.
– S. Āboliņa (MP, JL, coalition). She referred to the fact that the Constitutional Court has decided that the decision on pension cuts was unjust and legally flawed and that these pensions have to be payed back. She stressed that Latvia is still in the situation where only the IMF is agreeing to lend money to Latvia because no international market will lend as any means. She invited all political forces to support the draft decision.
– J. Sokolovs (MP, PCTVL, opposition). He asked whether, if this decision is so important, it has to be adopted in such hussle and in such form. He stressed the fact that such important and strategic decisions are being adopted in such great hurry without serious discussions, without analysis of consequences and simply because the international lenders are waiting. He argued that Latvia is a parliamentary republic and not the Government, not the IMF, not some other organization but the Parliament has to take important decisions.
– O. Kastēns (MP, LPP/LC, opposition). He stated that the parties which are in the opposition at the moment but were in coalition when the agreement with international lenders was reached, now receive complaints about that agreement. He argued that he has re-read the agreement which was concluded with lenders and „there was not one word concerning the pension cuts which afterwards turned out to be anticonstitutional.” As the things mentioned in the agreement, he stated, structrual reforms, stabilization of the banking sector but there was nothing about „such weird issues” as reduction of wages of working seniors. He argued that this is a vote for stability of the Government and his party is ready to support this document. However „previous experience with decisions taken in secrecy and realised against the Constitution create doubts: What will happen during the next half year? What type of decisions will be made? Will the pensions again be reduced? And, if the VAT will be increased, then Latvia will for long years to come [be dependent on the IMF]. And in this situation it cannot be allowed.” He inter alia stated that the Parliament has been turned into the hostage of Government’s instability.
– U.I. Grava (MP, JL, coalition). He argued that everyone wants to position the IMF as some huge Latvian state foe who has led us and future generations to a situation from which we will not come out. He stated that the IMF has exceeded his lending quota concerning Latvia six times. „The IMF has given to us the same amount as to ten poorest countries in the world but we treat [this institution] as our great enemy! We should appreciate what has been done by the international lenders by coming to Latvian aid and their actions have already brought fruit. At this moment our financial sector has stabilised, our bank capital has grown […]. We have already stepped out from this deep crisis and that has happened thanks to these loans which came from other world countries. And at this moment we cannot create new doubts and suspicion [which would lead] to reducing our credit ranking and scaring off foreign investors.”
– A. Seile (MP, PS, coalition). She stated that the PS will support the draft decision. She argued that the approval by the Parliament does not imply any new commitments. She argued that the decision and the letter of intent refers only to the agreements which were concluded by the Government already during the Government of I. Godmanis. The authorization by the Parliament will simply be a boost for Latvian economics. In case of decisions about new lenders and new amounts of loans, a special law will be necessary.
– V. Buzajevs (MP, PCTVL, opposition). He argued that the Parliament has a right and an obligation to implement in its authorization additional restrictions to the Government with the aim of protecting Latvian society and financial system.
– K. Pētersone (MP, LPP/LC, coalition). She stressed the problems created by the fact that the draft decision authorizes the sending of the letter of intent whose content is confidential and therefore cannot be openly discussed. She offered a discussion concerning the question, why the Government in essence has expressed a lack of confidence in the Parliament (which has voted for this Government) and requires that the Parliament with this decision gives an unconditional loyality pledge to the Government. She stated that this process in which the Parliament now has to vote for this decision is a result of serious disagreements within the Government and creates unnecessary tensions in the society.
– A. Bērziņš (MP, LPP/LC, opposition). He argued that the original position of the LPP/LC was to vote agains the decision projects. The faction was not against determining the maximum amount the Government can borrow and the aims for which this lended money can be used, however, they were against the fact that it is unclear to the Parliament on what conditions these new loans are being given as well as against the fact that the Government tries to tie together all the memorandums which were created during the previous Government and their addendums which are being drafted now.
– J. Urbanovičs (MP, SC, opposition). He stated that his faction was not in opposition towards the state, society and the population; they have been in opposition to politicians who have behaved reckless and even punishable. He argued that the SC is in opposition towards the Government, governing coalition, but not the people. Therefore the SC with its vote will not delay the work of coalition but will not take any responsibility. Basically, he stated that they will vote for the decision but refuse any responsibility about this decision.
In general this Parliamentary hearing illustrated the disagreement in the coalition between the TP and other political forces because the TP had sumitted an additional project which would have imposed an obligation upon the Government to report all the actions regarding the international financial aid and would restrict the areas the Government could propose amendments to. For example the proposal by the TP provided that the taxes will not be increased etc.
In the end the Draft decision “The Task for the Cabinet of Ministers to borrow financial means in the framework of the international financial assistance programme” was approved with 55 voting in favour, 22 – against and 3 – abstained.
What is the actual role of Parliament with regard to the adoption/transposition into the national legal order of the financial assistance instruments?
Previously the Parliament did not play any role in the adoption of the financial assistance instruments besides being the one later deciding upon laws necessary for complying with the demands made by them. However, the procedure has been changed since Latvia originally received international financial assistance. Please refer to the Question X.4.
Describe the relevant content of the financial assistance instruments.
The Memorandum of Understanding (MoU) (signed on 28 January 2009 by the European Commission on one side and Latvia represented by the Prime Minister, Minister of Finance, Governor of the Bank of Latvia and the Chairwoman of the Financial and Capital Market Commission)on the other side :
– the EU financial assistance was provided in support of Latvian Economic Stabilization and Growth Programme (ESGP) “to maintain domestic and international confidence in the financial system, to contribute directly and indirectly to arresting and reversing the worsened cost competitiveness and inflationary pressures by reductions in public sector wage costs as a centrepiece of a much tighter fiscal stance, and to strengthen the economy’s growth potential by a range of structural reforms”
– the financial assistance will be distributed in six instalments (the first instalment was released subject to entry into force of the Loan Agreement and this MoU – based on Latvian authorities’ “Economic stabilisation and revival programme” – and amended budget for 2009 (both adopted by Parliament on 12 December 2008)).
– Latvia undertook to carry out fiscal consolidation and expenditure control, in particular, reduction of public sector wages and employment, fiscal governance reform, banking sector stability, financial sector regulation and supervision reforms, as well as structural reforms.
– In particular Latvia undertook to carry out the following actions (summary in regard to the requirements for all six planned instalments):
· Fiscal consolidation:
§ adoption by the Parliament of a supplementary budget law for 2009, including 5% contingency reserve;
§ progress with 2009 government cash flow deficit below 5% GDP;
§ public sector nominal wage and employment cuts;
§ improve the wage payment system for direct public administration employees
§ establishment of a single human resource planning and management system for public administration institutions
§ enactment of a Law on Public Private Partnership
§ enactment of the amended Budget and Financial Management Law
§ any additional revenue relative to budget plans should be used to achieve a lower-than-targeted budget deficit
§ enactment of the 2011 budget law targeting a general government deficit of not more than the Treaty reference level of 3% GDP
§ verification of progress in public sector nominal wage and employment limitation
· Fiscal governance reform:
§ adoption of measures to strengthen public finance management (improve budget formulation process, strengthen Ministry of Finance’s spending controls, making the medium-term budget framework operational, increase budgetary transparency and external oversight);
§ The Ministry of Finance macroeconomic forecasts in the future should be reviewed by the Ministry of Economy and Bank of Latvia in consultation with external experts;
§ Publicly owned enterprises must give commitments to deliver reduction in compensation levels;
§ Implementation of the State Audit Office recommendations from September 2008.
§ Progress with the implementation of the amended Budget and Financial Management Law
· Financial sector regulation and supervision:
§ Ensuring that minority shareholders of Parex Bank do not benefit from the resolution of the bank;
§ strengthening financial sector supervision by the Financial and Capital Market Commission (FCMC)
§ take measures to ensure that the banking system is adequately provisioned with capital
§ take measures to strengthen cross-border supervision and communication between the supervisory authorities in home and host countries
§ establish a framework enabling banks’ clients to require debt maturity and currency restructuring of outstanding loans on market conditions
§ take additional measures to strengthen financial sector supervision and regulation
§ implement measures to strengthen Bank of Latvia and the FCMC’s capacity to assess and address solvency and liquidity concerns in banks in timely manner
§ improvement of the personal bankruptcy framework
§ The Bank of Latvia should closely monitor developments in credit markets and real economy
· Structural reforms:
§ adoption of a comprehensive and credible export promotion strategy’
§ take steps to ensure effective access to financing for SMEs
§ set up a systematic and comprehensive system for the evaluation of the impact of EU Funds’ interventions
§ develop a standardized methodology for formal eligibility requirements in public procurement procedures
§ increase availability of active labour market policies
§ review the economy-wide wage-setting mechanisms to foster employee compensation evolvement
§ improve the VAT overpayment refund system
§ take measures to avoid further delays in implementation of the Operational Programme “Human Resources and Employment”
§ the number of public R&D priorities should be reduced to provide more resources to relevant research fields
§ within the framework of the 2009 budget law, have committed enough budgetary resources for implementation of the planned Structural Funds co-financed programmes
§ within the framework of the 2010 and 2011 budget laws have committed enough budgetary resources for implementation of the planned Structural Funds co-financed programmes
– The MoU as well provided for the establishment of a detailed system for monitoring and reporting.
The Commission services carried out a review mission in cooperation with the IMF staff from 27 May to 17 June 2009 to assess the progress made with respect to the specific conditions attached to the second instalment of the EU assistance.
Supplemental Memorandum of Understanding (first addendum) (First addendum MoU) signed by the European Commission on one side and Latvia represented by the Prime Minister, Minister of Finance, Governor of the Bank of Latvia and the Chairwoman of the Financial and Capital Market Commission) on the other side:
– because of the more favourable developments in the balance of payment needs and following the disbursement of the second instalment, it is appropriate to postpone the third and fourth instalments to the fourth quarter of 2009 and the first quarter of 2010, respectively.
– “The second instalment of EUR 1.2 billion shall be released subject to the entry into force of the Loan Agreement and this revised Supplementary MoU, which […] is based on the amended budget for 2009 adopted by the Latvian Parliament on 16 June 2009 and on key measures indicated by the Latvian authorities in order to complete the consolidation over the next years”.
– in view of the significant further deterioration in the economic outlook the deficit targets referred in the MoU of January 2009 were replaced by new targets
– Specific economic policy criteria spelled out in the MoU concerning the third and following instalments will be augmented by the following actions:
· progress with the preparation of the 2010 budget law entailing a further improvement in the budget balance by 500 million LVL, thereby targeting deficit of no more than 8.5% GDP;
· all significant Cabinet decisions or other decisions with a fiscal impact, including on social security or any guarantee scheme, shall be announced and undertaken only after discussions with the European Commission and the IMF;
· increase financing for local governments to meet the raising social needs;
· strengthen the powers and analytical capacities of the Ministry of Finance to control the preparation and execution of the budget; introduce a system to control contingent and implicit liabilities;
· effective sanction procedures shall be put in place for individual misuses of public funds;
· prepare amendments to the Budget and Financial Management Law with assistance from EU and IMF experts;
· adopt a unified public sector wage grid;
· strengthen the capacity of the Structural Funds and Cohesion Fund Managing Authority to control and decide on EU funding spending;
· establish separate, special state budget sub-programmes for each EU funds’ intermediate body by the next budgetary year, as well as a separate special Treasury account for the cash management of all EU funds;
· when drafting the 2010 budget law, sustain appropriate human resources in institutions dealing with management of EU funds;
· undertake steps to address the high indebtness of the private sector;
· progress in public sector nominal wage and employment cuts;
· increase funding of active labour market policies;
· Ministry of Finance shall coordinate and mobilize international and national expertise under the ESF-co-financed initiative for administrative capacity building;
· the Small Business Act shall be implemented by providing a special program for supporting small and micro companies;
· operations of state and government-owned companies and their subsidiary companies shall be assessed against the criteria set in the Latvian State Administration Law.
Supplemental Memorandum of Understanding (second addendum) (Second addendum MoU) signed by the European Commission on one side and Latvia represented by the Prime Minister, Minister of Finance, Governor of the Bank of Latvia and the Chairwoman of the Financial and Capital Market Commission)on the other side :
– A first review mission was carried out by the Commission services in cooperation with IMF staff from 27 May to 17 June 2009. Based on the findings a Compliance Note sent by the authorities on 26 June 2009 and in consultation with the Economic and Financial Committee, the economic policy criteria for the second instalment, as laid down in the memorandum, were considered to be broadly fulfilled or not applicable in view of the larger-than-expected deterioration in the economic situation.
– The Commission carried out the second review mission in cooperation with the IMF staff from 2 to 14 December 2009 to assess progress made with respect to the specific conditions attached to the third instalment of the EU assistance, which amounts to EUR 0.5 billion. Based on the findings of the Commission mission, a Compliance Note sent by the authorities on 11 December 2009 and in consultation with the Economic and Financial Committee, the economic policy criteria for the third instalment, as laid down in the MoU and the Supplemental MoU are considered to be broadly fulfilled.
– New specific conditions:
· in consultation with international organisations and the National Tripartite Cooperation council, extend the job (position) catalogue including local government and ensure that wages of local government do not exceed upper limits of the public sector wage grid;
· specify how to implement the September 2009 recommendations by the State Audit Office regarding the assessment of the implementation of the 2008 State budget and budgets of local governments;
· preparation for the 2011 budget should be started in the first half of 2010. Technical proposals producing savings or additional revenues, based on structural reforms in key sectors, for a total amount significantly larger than the fiscal consolidation needed in 2011 shall be submitted to the European Commission and IMF;
· prepare a policy report on long-term tax reform;
· prepare changes into the pension system;
· review the social insurance benefits system;
· put into place effective sanction procedures for individual misuses of public funds;
· prepare a strategy on how to integrate the institutions and human resources management experts in charge of management and planning of human resources within the public administration;
· by the end of 2010 prepare a new Fiscal Responsibility Law;
· improve the analytical methodology and perform an analysis of all functions and services provided by the public institutions and their respective costs;
· the restructuring plan of Parex Bank should be spelled out in further quantitative details and submitted to the European Commission;
· a debt restructuring strategy compatible with fiscal constraints will be launched, while continuing to work on market-based approaches to restructuring;
· a comprehensive action plan for implementation of the medium-term strategy for the Mortgage and Land Bank should be adopted, after consultation with the European Commission and IMF;
· strengthen the capacities of the State Employment Agency;
· in 2010 demonstrate efficient expenditure of at least 66 million EUR from the ESF, 185 million EUR under the Cohesion Fund and 291 Million EUR under the ERDF;
· within the framework of the 2011 budget law, commit enough budgetary resources for implementation of the planned Structural Funds co-financed programmes;
· take measures to improve the effectiveness and scope of public procurement;
· adopt measures for tackling the grey economy and undeclared work;
· take measures to approve all the regulations for the ERDF financing RTD activities for the full period until 2013;
· review state and local government-owned companies and their subsidiaries against the criteria set in the Latvian State Administration Law with a view to a possible restructuring;
· take steps to improve the business environment.
Supplemental Memorandum of Understanding (third addendum) (Third addendum MoU) signed by the European Commission on one side and Latvia represented by the Prime Minister, Minister of Finance, Governor of the Bank of Latvia and the Chairwoman of the Financial and Capital Market Commission) on the other side :
– The fourth instalment shall be released subject to the signature of this third Supplemental Memorandum of Understanding. The Commission services carried out the third review mission in cooperation with the IMF staff from 25 May to 7 June 2010 to assess progress made with respect to the specific conditions attached to the fourth instalment of the EU financial assistance, as laid down in the second Supplemental Memorandum of Understanding, which amounts to EUR 0.2 billion. Based on the findings of the mission, a Compliance Note sent by the authorities on 14 May 2010 and in consultation with the Economic and Financial Committee, the specific economic policy criteria were considered to be broadly fulfilled. Since the previous review mission, the 2010-2011 macroeconomic outlook has improved, supporting compliance with the policy programme, including the 2010-2012 fiscal consolidation path to achieve a deficit of below 3% of GDP by 2012.
– Conditions for the fifth instalment relate to consolidating the gains made thus far while setting the stage for fulfilling the Maastricht criteria by 2012:
· Concerning budgetary consolidation, the Latvian authorities are committed to achieving a 2010 deficit target of no more than 8.5% per cent of GDP in ESA95 terms and a fiscal deficit of no more than 6 % of GDP in ESA95 terms in 2011.
· As regards expenditure cuts, the authorities are considering options that would enable the new government to rationalize expenditure while protecting the poorest in society, building among other things on the recommendations of a recent World Bank public expenditure review.
· In other areas of the programme, measures are to be taken to strengthen fiscal governance, increase transparency and improve public financial management including by strengthening the budget formulation process, reinforcing the Ministry of Finance’s spending controls, and making operational the medium-term budget framework. Financial sector measures should aim at guaranteeing wider banking sector stability in the medium to longer term, and at facilitating insolvency procedures and a quick implementation of rehabilitation plans. The fixed (narrow band) exchange rate will remain the anchor for monetary policy until adoption of the euro. The economic policy programme includes structural reform measures, with a view to improving the management and the performance of the public administration, accelerating EU fund absorption, strengthening public procurement, supporting active labour market and lifelong learning policies, improving the business environment and supporting export promotion measures
· The outlook regarding external financing suggests that international medium-term financial assistance envisaged in the programme is sufficient and there may be no need to draw from some of the loans by bilateral lenders. The improved economic and financial situation is creating conditions for the central government to gradually return to international capital markets under reasonable terms.
· A new point in the SMoU states: “For Latvia, the Supplemental Memorandum shall become effective after completion of internal procedures required under the Laws of Latvia. The Supplemental Memorandum may be amended upon mutual agreement of the parties in the form of an Addendum. Any such Addendum will be an integral part of the Memorandum and become effective according to the same procedures as the Memorandum.”
§ The general government budget deficit targets for 2010, 2011 and 2012 in ESA95 terms are set at no more than 8.5%, 6% and below 3% of GDP, respectively.
§ All significant Cabinet decisions or other decisions with a fiscal impact, including on social security or any guarantee scheme, shall be announced and undertaken after discussions with the EC and the IMF.
§ Any additional revenue or savings achieved relative to deficit targets should be used to achieve a lower-than-targeted budget deficit or, after consultation with the EC and IMF, to accelerate EU funds expenditure within the budgetary deficit targets set above or increase funding for active labour market and social safety net measures.
§ By end-October 2010, technical proposals producing savings or additional revenues, based on structural reforms in key sectors, for a total amount significantly larger than the fiscal consolidation needed in 2011 shall be submitted to the EC and IMF.
§ After preparing proposals for changes in the pensions system by end-June 2010, in consultation with the EC and the IMF, submit to the Parliament by end-November 2010 concrete proposals to be implemented in 2011 in order to preserve future sustainability and adequacy of the three pillars of the pension system.
§ After reviewing the social insurance benefit system by end-June 2010, submit to international lenders by end-September 2010 concrete proposals aiming at streamlining the social insurance benefits system
§ By end-September 2010, submit to the Parliament a new Fiscal Responsibility Law complying with and supplementing the EU fiscal commitments and framework.
§ Improve the management and performance of human resources in the public administration
§ By end 2010, submit to international lenders an assessment of options as regards possible restructurings, transformation into state agencies, or privatizations of part of state and local government-owned companies and their subsidiaries, against the criteria set in the Latvian State Administration Law.
§ By end-December 2010, with advice from an independent consultant, develop proposals for optimization of the system of development financial institutions and integrate, as appropriate, different development institutions operating on behalf of the government.
Supplemental Memorandum of Understanding (fourth addendum) (Fourth addendum MoU) signed by the European Commission on one side and Latvia represented by the Prime Minister, Minister of Finance, Governor of the Bank of Latvia and the Chairwoman of the Financial and Capital Market Commission) on the other side :
– The commission staff carried out the fourth review mission in cooperation with the IMF from 5-15 April 2011. The specific economic criteria were considered to be broadly fulfilled. Since the previous review mission, further budgetary and structural measures, supported by an improved macroeconomic outlook (the economy bottomed out in 2010 and GDP is expected to expand by 3.3% in 2011 and 4% in 2012), ensured compliance with the policy programme.
– Budget deficit targets for 2011 and 2012 no more than 6% and 3%, respectively.
– by mid-August identify options for deficit-reducing measures to be included in the 2012 budget.
– agree on the substance of the draft of the Fiscal Responsibility Law with the Commission and the IMF.
– evaluate the efficiency and effectiveness of existing taxation allowances;
– continue implementing measures for fighting grey economy;
– publish and make operational the “white list” of companies;
– review sanctions for illicit and abusive trade;
– submit to international lenders proposals for the reform of the scope and financing of the social safety net program for 2012 and beyond;
– implement State Audit Office recommendations regarding necessary improvements in the administration of the Social Safety Net Strategy;
– Appoint an official to deal with the Mortgage and Land restructuring process;
– implement the sales and work-out strategies for Citadele Bank and Parex Bank;
– develop a strategy for optimization of the system of development of financial institutions and integration;
– allocate sufficient budget resources for EU fund support;
– improve the quality of evaluations to assess how the EU funds support is contributing to achievement of expected results and to use the evaluation results for optimizing and planning of the 2014-2020 period;
– take action to reallocate funds away from activities, which did not have Cabinet Regulations approved by the end of 2010;
– sign all contracts for the first call for tender within the ERDF activity “Development of Research Infrastructure”;
– create conditions for independent experts;
– ensure conformity of national financial engineering instruments’ operations with the appropriate EU regulations;
– prepare an action plan for further centralizing management and planning of human resources within the public administration;
– the State Chancellery should identify administrative decisions (currently taken by the Cabinet of Ministers) which could be adopted by delegation to either individual ministers or senior public officials;
– promote more efficient use of energy and natural resources (fully transpose EU legislation, submit legislation to implement the National Renewable Energy Action Plan, apply new rates of the natural resource law, adopt a comprehensive second National Energy Efficiency Plan);
– prepare proposals to the Commission for re-allocating sufficient additional funding within EU Structural Funds for active labour market measures;
– introduce a monitoring system of training providers;
– continue reforms in vocational education;
– adopt a strategy setting good governance principles for state owned companies;
– submit to international lenders an assessment of options regarding possible restructurings, (partial) privatizations, and management structure of government and municipality-owned companies;
– develop recommendations for further state real estate management optimization;
– strengthen training activities for public officials involved in procurement activities;
– review the efficiency of current Electronic Procurement System;
– submit legal proposals on making centralized municipal procurements compulsory;
– establish a working group for devising administrative responsibility/penalties for violations in public procurement processes;
– submit the amendments to sector-specific legislation within the context of transposition of the Services Directive;
– ensure that the electronic Point of Single Contact is operation;
– prepare a draft state program for promotion of new production capacities;
– submit the plan to the Cabinet of Ministers to reduce the administrative burden;
– ensure a wider application of e-governance services;
– ensure significant progress related to the Rail Baltica construction.
Supplemental Memorandum of Understanding (fifth addendum) (Fifth addendum MoU) signed by the European Commission on one side and Latvia represented by the Prime Minister, Minister of Finance, Governor of the Bank of Latvia and the Chairwoman of the Financial and Capital Market Commission) on the other side :
– The fourth review mission had concluded that further funding from international financial assistance was not necessary, therefore, no funds were released after the fourth review and there are no plans to release additional funds.
– The draft Fiscal Discipline Law (FDL) has been discussed with the programme partners. That together with draft amendments to the Constitution to ensure higher standing of the FDL were adopted by the Government and submitted to the Parliament.
– Key measures to be taken with the 2012 budget include improving tax compliance, broadening the VAT base, broadening the real estate tax base, strengthening of the presumptive taxation of small and micro enterprises, increase in the financial stability levy, keeping the public sector wage bill at the level of 2011, creating incentives for local government to reduce spending, while safeguarding social safety net and investments, capping other expenditure.
– Key measures to be taken in 2012 with effect from 2013 include :
– selling of EU emission trading permits (LVL 25 million);
– by Sep 2012, adoption of comprehensive reform of the state family benefits and social assistance system to improve targeting to the poorest families;
– reforming the social safety net system to protect the poor, improve incentives to work and redure poverty traps;
– continuing limiting of the maximum amount of maternity, paternity, parental, unemployment and sickness benefits until the end of 2014;
– submitting a proposal to the Parliament to continue capping the replacement rate of maternity and paternity benefits at 80% from 2013;
– keeping in place the ceilings on social contributions for high income earners beyond 2014.
The reforms foreseen also included inter alia ensuring fiscal discipline, fighting the grey economy and tackling illicit trade, ensuring adequate financing for social needs and a transparent and cost-efficient delivery of social assistance and other measures.
What legal changes, if any, had to be made to accommodate ‘troika’ review missions, post-programme surveillance missions, etc?
There were no special debates concerning review missions and post-programme surveillance and no legal changes were introduced to accommodate the missions as such.
For every IMF recommendation the responsible implementation institution and deadline were determined. The pace of the implementation was supervised in the IMF missions. At the end of every supervisory mission the Government sent a letter of intent to the IMF and concluded the supplemental MoU. From the side of the Cabinet of Ministers, the fulfilment of commitments was controlled through the Strategic Development Plan of Latvia. The supervisory missions were coordinated among the lenders to avoid overlapping and increase inefficiency.
In general after a mission the Ministry of Finance prepared an informative report which explained the main statement made by the mission, their suggestions and established what should be done in this regard. So, for example, a Report from August 2010 states that the mission positively evaluated what has been done so far concerning the fiscal discipline, long-term stability reserves etc. The mission indicated some urgent tasks – amend the budgetary process, improve budget implementation and control mechanism, prepare a Draft Law on Fiscal Discipline, improve the wage system, rationalize the use of budgetary means especially in the transport sector.
Accordingly the Report contained as well a time framework for implementing particular recommendations (when should appropriate laws or regulations be proposed before the Government and when suggested to the Parliament). Also, the Report indicated two recommendations, which the Ministry of Finance has decided not to implement (in this case they were a suggestion to implement classification of budgetary resources and the introduction of three level structure for budgetary programmes).
There have not been relevant debates concerning the implications of these missions for sovereignty, constitutional law or the budgetary process.
Case law international instruments
Have there been direct or indirect legal challenges against the financial assistance instruments before a national (constitutional) court?
For the full analysis concerning the judgment please see the link provided in question VIII.8.
There have not been any direct legal challenges against the financial assistance instruments. However case No. 2009-43-01 to some extent can be seen as an indirect challenge. In this case which concerned pension cuts the Constitutional Court inter alia stated that the general decision on receiving international loans and their conditions is an important and significant national and societal issue which, according to the order established by the Constitution, had to be decided by the legislature.
The Constitutional Court argued that Art 35 and 36 of the Law on Budget and Financial Management contain the general framework for loans and credits, which the Finance Minister is allowed to issue and accept on behalf of the state. This authorization is sufficient when loans without any specific preconditions capable of significantly and in long-term influencing the state economy are considered. However there are cases when the loan contains specific conditions as it was the case with the loan from international lenders amounting to 7.5 billion EUR about which discussions started in 2008. The receivement of this loan is connected with political promises, loan agreements concluded with different actors and the necessity to carry out reforms in the areas of economic, monetary and social policy. The powers of the Cabinet of Ministers are limited by the principle of separation of powers. In accordance with this principle the Constitution allocates the legislative rights, rights most important for the life of the state, to the Parliament and, in some cases, even directly to citizens.
The Constitutional Court stated that the obeyance of the principle of separation of powers is especially important but that in light of the necessity to ensure the effective exercise of the state power, derogation from the demand that the legislator fully decides all issues is possible. This efficiency is ensured, if the legislator decides the most important questions but delegates the detailed questions and implementation to the Cabinet of Ministers. In this case, however, the general? decision should have been decided by the legislator. Even though the Parliament adopted the economic stabilisation programme and 2010 budget, these decisions according to the Constitutional Court could not replace the rights and obligations under the Constitution to decide all significant issues concerning these international loans, including the decision to authorize the Cabinet of Ministers.
Case law implementing measures
Is there a (constitutional) court judgment on national policy measures adopted in relation to the Memoranda of Understanding?
For the full analysis concerning the judgment please see the relevant Annex (side bar) for each case.
From 2009 to July 2012 there have been quite many cases at the Constitutional court arisen in the context of the national measures adopted in relation to the MoU and the Supplemental MoU or which have been connected with the implementing measures:
1. The case concerning refusal to index the pensions in 2009 (Case No 2009-08-01 – see Case Law Annex). In this case 20 MPs challenged changes in the Law on State Pensions which cancelled the indexation of pensions on 1st April 2009 and 1st October 2009. The applicants argued that these changes are not compatible with the principles of legitimate expectations and proportionality, which are covered by Art 1 of the Constitution (Satversme), as well as with the principle of a socially responsible state and the right to social guarantees as provided by Art 109 of the Constitution.
The Constitutional court admitted that the aim of the norm – to balance the revenue and expenditure of special budget for state pensions in order to guarantee the right of other persons to social guarantees – is legitimate. The court stated that there are other means to achieve this aim but if they were applied the consequences would be even more unfavourable. The court stressed that the law has not created a reduction in the amount of pensions already granted. As well the consequences have been mitigated by the temporal character of the measures (namely the indexation was foreseen to continue in 2010). Hence the court ruled that the changes in the Law on State Pensions are compatible with the Constitution.
2. The case concerning reduction of pensions (No 2009-43-01 – see Case Law Annex). The joined cases were initiated to challenge reductions of age and retirement pensions by 10% and the reductions of age and retirement pensions of working pensioners by 70% introduced due to the economic crisis. In these cases the Constitutional court in general dealt with two questions:
– Is there a breach of the right to social guarantees?
– Is there a breach of the principle of legitimate expectations?
The court in essence stated that the amount to which the right to social guarantees is ensured can change, if the financial capacity of the state changes, e.g. it is possible to reduce the social guarantees, if the financial resources of the state decrease. The Constitution does not guarantee a concrete and invariable level of social security. However, independently from the economic situation in the country, the legislator has to respect the fundamental rights as provided by the Constitution.
The court further argued that the pension system has to be sustainable. The economic situation in the country has influenced the stability of the special social budget and endangered this sustainability. The reduction of pensions carried out by the Parliament and the Government had a legitimate aim – to solve the problems faced by the social budget. The court considered the measures taken to be appropriate for achieving this aim.
When further assessing the compatibility with the principle of proportionality, the Constitutional court observed the fact that reduction of pensions is connected with the requirements posed by international lenders. However, the court stated that the international obligations cannot per se serve as an argument for restricting fundamental rights. Additionally, the Government could not be allowed to enter into these obligations without a proper Parliamentary mandate. In this particular case the international lenders had stated general demands, e.g. to reduce the expenditure of the special budget. However, the choice of means had been left to the Latvian legislator. Therefore, requirements of international lenders cannot serve as a justification.
The court stated as well that the materials before it show that the social budget has not been properly planned and several inconsiderate and rushed decisions have been made. Further, the court analysed whether the least restrictive measure was chosen and whether the possible alternatives have been evaluated appropriately. The Parliament and Government had both argued that the alternatives did not need to be considered due to the international character of obligations. The court rejected this argument by stating that an international agreement neither proves nor disproves the constitutionality of the provisions challenged. Additionally, the court indicated the lack of consultations with experts.
By taking that all into account, the Constitutional court decided that such practice is not compatible with the Constitution and the changes in law had been introduced without properly analysing the consequences the law has for various groups of pensioners. Additionally, the legislator has not taken into account that pensioners are a group which needs special protection. The state has to ensure a minimal level of social protection. This means that the Parliament had to introduce special measures for protection of those pensioners who do not receive a sufficient social security and who might need to request a social aid (help) as a result of the cuts introduced.
Because the legislator has not considered the alternatives and has not chosen the least restrictive measure, the challenged norms are not compatible with the Constitution.
Concerning legitimate expectations the court stated that this principle does not protect the person from every disappointment and does not exclude a possibility to introduce changes in legislation. However, a reasonable transitional period or compensation has to be provided. A fair balance between the interests of society and the interests of concrete pensioners in this case has not been found.
Therefore, the Constitutional court upheld the actions and concluded that the norms are incompatible with Art 1 and 109 of the Constitution.
Already before the changes in law and the judgment the Ombudsman expressed an opinion that reduction by 70% of the salaries of working pensioners is disproportionate. The reflection of the judgment in media was mostly positive due to the fact that already before there existed quiet a lot of pressure from society (especially pensioners) directed towards the Constitutional court in favour of a repeal of the amendments. The participants in the case, however, expressed some disappointment with the transitional period determined by the court for repaying the unpaid pensions.
The judgment in this case has been seen as a positive example when compared with the judgment concerning salaries of judges (where the court decided that freezing of the salaries of judges and prosecutors is anti-constitutional). While the judgment regarding the salaries of judges was mostly seen as grounded in judges’ response to their own wage cut, the pensions’ judgment was seen as finally protecting a socially less privileged group during the crisis.
3. The case concerning the payment of benefits for working parents amounting to 50% of the benefit which was granted originally (No 2009-44-01 et al. – see Case Law Annex). In these joined cases the norms challenged provided that the benefits for working parents or self-employed parents from 1st July 2009 to 2nd May 2010 will be reduced to 50% of the amount granted when the benefit was originally awarded.
The Constitutional court considered the compatibility of the norms with the principles of legitimate expectations and proportionality (under Art 1 of the Constitution), principle of equality (Art 91 of the Constitution) and the obligation of the state to support family and children established by Art 110.
The court concluded that the aim of the benefit is to compensate for the income a person loses due to taking care of a child and to support families with children. Concerning the principle of equality the court decided that working parents are not in the same or comparable situation with parents who do not work (are unemployed). Therefore, a differentiated benefit is acceptable.
The obligation to support families and children under Art 110 is accomplished already by not denying a parent who works and has a child under the age of one the benefit as such.
The court stated that a restriction on legitimate expectations can be acceptable, if it is beneficial to the society. The fact that the benefit is paid without any limitations as well to persons who are working is not compatible with the essence of social insurance (the benefit originally was introduced as a type of social insurance but without introducing any additional payments into the budget) and creates essential expenditure in the social budget. In 2009 when the legislator excluded the possibility for working parents to receive the benefit it as well provided for a transition period during which the benefit is reduced by 50%.
Therefore the court decided that the contested provision maintains the balance between legitimate expectations of concrete persons and the right of society to a sustainable system of state social insurance and balanced state budget and is compatible with Art 1, 91 and 110 of the Constitution.
The judgment received a mostly negative response from the general public. Such organisations as the Mothers Club strongly disagreed with changes in the law and were planning to bring a claim before the Constitutional court already at the time when the Parliament still had not taken the decision. In the media the case was compared to the Pensions case (where the court declared the cuts to pensions anti-constitutional) and it was not understood why the outcome was different.
4. The case concerning cuts to the retirement pensions of employees of the Ministry of Interior (No 2009-76-01 – see Case Law Annex). The contested measure provides that from 1st July 2009 to 31st December 2012 for a recipient of retirement pension who on 1st July 2009 was a socially insured person (employee or self-employed) the retirement pension will be re-calculated and reduced by 70% from the estimated amount of the retirement pension. The amount of retirement pension has to be updated starting with the first day of the month following the month when the person lost the status of a socially insured person.
The court stated that the retirement pension is an additional social guarantee for people who in the interests of the state have carried out special functions under specific circumstances. It stated that in circumstances when the pay for people serving in the Interior system has been substantially reduced a reasonable reduction of the amount of retirement pensions is acceptable. However, in this situation the reduction has been very essential – it amounted to more than two thirds of previous pension and, additionally, the overall income of socially insured persons was not taken into account.
Therefore, the court ruled that the contested provision is not compatible with Art 1 (principles of legitimate expectations and proportionality) and Art 109 (the right to social guarantees).
5. Case concerning the retirement pension cuts by 10% for those militaries who have reached the age for allocation of Age pension (No 2009-88-01 – see Case Law Annex). The Constitutional court stated that persons who have reached the age for allocation of the Age pensions constitute a special social group because, with the termination of paid labour, the income of these persons as well as the possibility to take part in various processes of social life will inevitably be reduced.
The regulation concerning retirement pensions of the military had been in force since 1998 and, even though it has changed over time, the changes had always been beneficial for persons affected. Therefore, the court considered the regulation to be sufficiently determined and as such it could have created legitimate expectations. By reducing the pension and not providing any compensating mechanisms, the legitimate expectations had not been obeyed and the principle of proportionality had been breached.
Thus, the court concluded that the contested provision is incompatible with Art 1 and 109 of the Constitution.
6. Case concerning changes in terms of payment of benefit for loss of ability to work (No 2010-17-01). The case concerned:
– not paying the benefit for loss of ability of work, if the ability to work has been lost for 10-24%;
– not paying the benefit, if a person received a pension exceeding the amount of the benefit;
– paying the benefit only in so far as it exceeds the pension;
– paying the benefit to persons who receive Age pension amounting to 80% of the amount awarded;
– not paying the benefit during the period when a person is receiving unemployment benefit;
– not paying the benefit for losing a breadwinner during the period when a person is receiving unemployment benefit.
The Constitutional court stated that the reduction of the benefit for loss of the ability to work does not per se mean that the person loses the fundamental right to social guarantees in case such risk arises. The court argued that Art 109 of the Constitution does not require the state to provide social security explicitly in the form of payment of such a benefit. Concerning situations in which a person receives various social payments (e.g. benefit for the loss of ability to work and unemployment benefit at the same time), the court emphasized the importance of the principle of ensuring a social security system, which foresees that one and the same loss of income from employment is not reimbursed repeatedly.
Concerning legitimate expectations, the court stated that in this case a reasonable transition period was ensured.
The Constitutional court therefore ruled that the contested provisions were in conformity with the Constitution.
7. Case concerning changes in the Law On State Funded Pensions (No 2010-21-01 – see Case Law Annex). The contested provisions provided for cuts to the anticipated amount of contributions to the occupational pension scheme. The Parliament in its response has pointed out the danger to the social budget resulting from the economic crisis and to the necessity to balance the income and expenditure of the social budget as reasons behind the cuts.
The Constitutional court stated that cuts to the funding of occupational pension schemes can be allowed only in special circumstances and for a short period of time. Likewise the court concluded that the established pension scheme has created legitimate expectations. It further argued that even in especially hard economic circumstances the amount of social insurance contributions for occupational pensions can be reduced only so far that the pension scheme would still be able to ensure retirement savings. The occupational pensions system is closely connected with the trust of people in the pension system in general and their interests to pay taxes. Therefore, the legislator has to choose a regulatory framework which is able to ensure sustainability of the system.
At the same time the court stated that with the help of the challenged norms the threat to the pension system created by the economic crisis has been mitigated. It took into account that the contested provisions create a unitary regulation and that it keeps in mind the aim of establishing a system for pensions. The amount of contributions is such as originally was considered minimal for creating savings (2 %). Additionally, the increase of contributions has been foreseen in the future.
Therefore, the court concluded that the contested provisions are compatible with Art 1, 105 and 109 of the Constitution.
8. Case concerning salaries of judges (2009-111-01 – see Case Law Annex). There were various cases which in general concerned freezing of salaries, cuts and the introduction of ceiling for salaries (the changes in law provided that the highest salary of any judge cannot exceed the salary of the Prime Minister of Latvia). These cases might be interesting to compare with the ones concerning general cuts. However, one of interest and one where crisis measures were more considered was Case No 2009-111-01.
This case dealt with cuts to the salaries of judges and the court decided that a reduction by 15% is disproportionate and breaches the principles of legitimate expectations, solidarity and the separation of powers. However, the repeal of the contested provisions would endanger the stability of the budget and welfare of society. At the same time the court decided that the legislator would need time to deal with imperfections in the law and, since according to the judgment in case No 2009-11-01 the provisions concerning the freezing of salaries of judges expire and the salaries will again be determined with the help of calculation by using the coefficient stated by the law, such a percentage of reduction can be considered solidary. Thus the court ruled that the reduction of salaries is compatible with the Constitution, if starting from 1 January 2011 the salaries of judges will be calculated according to the Law On Judicial Power in conformity with the judgment in case No 2009-11-01.
When considering the ceiling of salaries imposed by the assimilation of salaries to the salary of the Prime Minister, the court argued that both the term of office and the salary of the Prime Minister can be a question of political choice and such, only on political observations based determination of salaries of judges, breaches the principles of separation of powers and independence of the judiciary.
9. Case concerning Credit Institutions Law I (No 2010-60-01 – see Case Law Annex). The challenged norms introduced the rules according to which a credit institution transitions into other person’s property or use. The norms inter alia provide that a permit for credit institutions changing owners has to be obtained from the Financial and Capital Market Committee and that in some cases the transition cannot be declared void. The law as well introduces restrictions to the property rights of minority shareholders by defining the procedure for increasing the equity capital of credit institutions. These changes in law were introduced in light of the events surrounding the state taking over the Parex Bank. The MPs who submitted the claim argue that the only objective of the law amendments is to give the credit institution an opportunity to avoid fulfilling its commitments.
The Constitutional Court ruled that the challenged norms are compatible with the Constitution (Articles 1, 90, 92 and 105). The court concluded that the provisions introduced by this law did not envisage alienation of property without compensation.
The court argued that concerning the principle of legitimacy, even though there was no transition period when the law was amended, at the time no transfers of a credit institution were taking place. Therefore more important was the protection of significant interests of society. Also the right to information has not been breached because the law has been adopted and announced in the process in accordance with the law. The norms are not unclear because with the help of interpretation their content is sufficiently clear.
The rule that the transfer of a credit institution cannot be declared void is necessary in order to protect third persons and to ensure welfare of society. The rule ensures that the credit institution which is in trouble is transferred into hands of an institution which will be able to ensure the former’s solvency and does not allow returning to the previous situation. At the same time in case of a breach nothing precludes going to the court and exercising the right to compensation and damages. The provisions do not provide for taking a property without compensation and do not provide that either transferee or overtaking institution could avoid any commitments. The aim of restriction providing that the transfer cannot be pronounced void aims at protecting rights of other persons and public welfare. Therefore the Court held that these provisions are compatible with the Constitution.
Concerning the procedure for increasing the equity capital, the Constitutional Court argued that the public benefit of this provision is connected with salvaging one or several credit institutions of systematic importance and ensuring the public welfare and persons’ rights. However, since the restrictions to the shareholders’ fundamental rights not only affected the rights of persons who submitted the constitutional complaint but as well would create doubts among potential international investors about whether Latvia is favourable for safe investments, the Court held that the provision is disproportionally restrictive and incompatible with Art 105 Constitution.
Bond purchases ECB
Describe the political, economic and legal situation leading up to the moment where the European Central Banks started buying government bonds on the secondary market (through the Securities Markets Programme, SMP).
There is no information concerning the ECB buying Latvian bonds on the secondary market.
Conditionality bond purchases ECB
What national policy measures have been requested by the ECB in exchange for the acquisition of government bonds on the secondary market? How have these requests been subject to debate in light of their implications for (budgetary) sovereignty, constitutional law and the budgetary process?
There is no information concerning the ECB buying Latvian bonds on the secondary market.
What other information is relevant with regard to Latvia and financial support?
The three year international loan programme for Latvia was successfully closed in the end of 2011. The initial intended amount was planned to be 7.5 billion EUR. Since the economic and financial situation improved, Latvia did not need the full amount and used altogether only 4.4 billion EUR. Since 2008, budget consolidation in the amount of 2,3 billion LVL has been carried out with the fiscal influence of 17% GDP (including both reduction of expenses and increasing revenues). Latvia in June 2011 and February 2012 returned to the international financial markets by issuing respectively ten-year bonds worth 500 million and five