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Cablegate: Latvia's Economic Crisis Leads to Political

VZCZCXRO8163
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSL RUEHSR
DE RUEHRA #0434 2331218
ZNR UUUUU ZZH
R 211218Z AUG 09
FM AMEMBASSY RIGA
TO RUEHC/SECSTATE WASHDC 6010
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHRK/AMEMBASSY REYKJAVIK 0067

UNCLAS RIGA 000434

SIPDIS

DEPT FOR CAROL WERNER IN EUR/NB
DEPT FOR DAVID WRIGHT AT U.S. DEPT OF TREASURY

E.O. 12958: N/A
TAGS: ECON EFIN PGOV LG
SUBJECT: LATVIA'S ECONOMIC CRISIS LEADS TO POLITICAL
DISPUTE OVER HEALTH AS PEOPLE,S PARTY ATTEMPTS A MAKE-OVER

1. (U) Summary: Implementation of austerity budget cuts have
revealed intense divides within Latvia,s governing
coalition. A particularly divisive political battle
intensified in July over cuts in the public health sector,
pitting Prime Minister Dombrovskis, and his New Era party,
against the Minister of Health, Baiba Rozentale, and the
People's Party. While a compromise has been reached, the
political struggle continues, and is likely to heat up as
People,s Party attempts to take advantage of the
unpopularity of the austerity measures. End summary.

2. (U) Budget cuts, required as part of Latvia,s
international loan package, have resulted in a divisive,
public dispute between the Prime Minister,s New Era party
and the People's Party over budget austerity measures. In
July, after replacing the previous Minister of Health, new
Minister, Baiba Rozentale (People,s Party) immediately
demanded that funding (USD 100 million) be restored to avoid
a collapse of the public health sector. She then announced
several hospital closures along with a reduction in emergency
medical services, which led to a few small street protests.
Dombrovskis accused her of making excessive cuts to hospitals
rather than strategically cutting the ministry's budget.
Stating that has she has been unable to explain the rationale
for the severe cuts, Dombrovskis implicitly accused her of
manufacturing a political crisis for the benefit of her party.

3. (U) On August 7, the PM and MOH announced a compromise
deal to allocate some additional money to the health sector
and hold weekly meetings to identify structural reforms to
preserve essential services. Part of this additional
financing will come from a World Bank Development Policy
Lending program targeting social safety net and public
administration reform. This loan (USD 250 million) allocates
25 percent, or USD 62.5 million, to the health sector.
Another 25 percent is earmarked for education with the rest
reserved for other social services (40 percent) and public
administration (10 percent).

4. (SBU) It remains to be seen, given the intensity of the
political debate over health care reform, whether sustainable
restructuring will be possible. The health care sector
debate is merely the most public of a series of political
battles being waged over the budget cutting process across
ministries. Latvian newspaper editorial pages continue to
speculate about the inability of New Era and the People's
Party to cooperate on the 2010 budget process. This
uncertainty is fueling growing concerns that Latvia's
governing coalition will fail to produce a 2010 budget.

5. (U) Public statements by leaders of both parties continue
to inflame the situation. Despite a conciliatory public
tone, Dombrovskis admits that the 2010 budget "will be a test
to show the political will of the parties." When asked to
speculate about whether or not the People's Party will
attempt to bring down the current government Dombrovskis
warned against "Destructive activities (that) have already
left a negative impact on Latvia's international image." In
response, People's Party Chairman, Mareks Seglins, has
publicly threatened that not listening to his party "could
end badly" for the governing coalition.

6. (SBU) Comment: The People's Party, which has seen its
popularity plummet to well below the 5 percent minimum to
gain seats in parliament, is clearly trying to re-position
itself for the 2010 elections. Most analysts expect the
party, which is widely blamed for the current economic
crisis, to lose a majority of its seats in the next
elections. With dim prospects for the future, People,s
Party has little to lose by seeking to take advantage of
growing unhappiness with the breadth and depth of the budget
cuts. Many (both in and out of politics) believe that
People,s Party is seeking to cast itself as an opposition
party that has stood up for the common man in the face of
economic catastrophe. While it seems doubtful that voters
will buy this make over, a lot can happen between now and
next spring,s elections. End comment.
ROGERS

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