EU finance chiefs tackle Latvia

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The crisis in Latvia is among the topics to be discussed at a meeting of European Union finance ministers.

The Latvian government agreed on Monday to cut 500m lats ($992m; £615m) from its already-strained budget this year.

Fears have grown that Latvia, hit hard by recession, may have to devalue the lat, triggering problems in the region.

But Latvian Finance Minister Einars Repse said any discussion of devaluing the country's currency was "absolutely out of the question".

Joaquin Almunia, the European commissioner for economic and monetary affairs, said the EU was in "permanent contact" with Latvia and a decision to release extra aid to the country would depend on Latvia's budget cuts.

Regional fears

If Latvia is forced to abandon its currency peg to the euro, other countries in the region, such as Estonia and Lithuania, may be forced to abandon theirs as well.

The Latvian crisis could also hit European banks invested in Latvia. Swedbank, the biggest lender in the Baltic region, is seen as particularly vulnerable and Sweden's krona has been hit hard in recent days.

Latvia was granted a 7.5bn-euro ($10.6bn; £6.5bn) EU and International Monetary Fund bail-out last December, and hopes to secure a further 1.2bn euros from this pot in July.

Latvian Prime Minister Valdis Dombrovskis said the IMF would likely wait until the budget was passed in parliament before approving any further aid. Parliament will vote on the budget on 17 June.

Ecofin

The meeting of the Economic and Financial Affairs Council, or Ecofin, in Luxembourg on Tuesday will focus on the EU's response to the recession and the budgets of member states.

The Latvian prime minister has tried to reassure investors

The ministers will discuss an EU proposal to create a potential "super-regulator" in the form of an EU "risk council" to oversee the financial services industry across national borders, to be chaired by the head of the European Central Bank.

Several countries have signalled opposition to this, including the UK.

City Minister Lord Myners said better cross-border regulation was needed, but moving financial supervisory powers to a European level might undermine future responses.

"National supervision must be pre-eminent when the cost of failure of an institution lies with the taxpayer," Mr Myners wrote in the Financial Times.

The viability of the EU's stability and growth pact, which limits budget deficits to no more than 3% of GDP and a maximum national debt of 60% of gross domestic products, will also be discussed.

Several EU member states have breached this as they have been forced to bail out their banks and increase public spending through borrowing during the economic downturn.

"We must distinguish between the crisis deficit and the structural deficit," said France's Economy Minister Christine Lagarde. "But the stability pact is intact, I do not want to touch it. It's the collective rule that we must continue to observe."