Viewing cable 09VILNIUS171
Title: LITHUANIAN ANALYSTS TELL TREASURY LITHUANIA MAY

IdentifierCreatedReleasedClassificationOrigin
09VILNIUS1712009-03-31 07:49:00 2011-08-30 01:44:00 CONFIDENTIAL Embassy Vilnius
R 310749Z MAR 09
FM AMEMBASSY VILNIUS
TO SECSTATE WASHDC 3394
INFO AMEMBASSY RIGA 
AMEMBASSY STOCKHOLM 
AMEMBASSY TALLINN 
AMEMBASSY WARSAW 
USEU BRUSSELS BE
DEPT OF COMMERCE WASHINGTON DC
DEPT OF TREASURY WASHINGTON DC
C O N F I D E N T I A L VILNIUS 000171 
 
 
COMMERCE FOR ITA:PDACHER 
TREASURY: EMEYER AND DWRIGHT 
 
E.O. 12958: DECL: 03/31/2019 
TAGS: ECON EFIN LH
SUBJECT: LITHUANIAN ANALYSTS TELL TREASURY LITHUANIA MAY 
NEED TO GO TO IMF SOON 
 
REF: STATE 23758 
 
Classified By: Ambassador John A. Cloud for reasons 1.4 (b) and (d). 
 
SUMMARY 
------- 
 
¶1.  (C) During their March 18-19 visit to Lithuania, 
Treasury's Acting Deputy Assistant Secretary for Europe and 
Eurasia, Eric Meyer and David Wright, an International 
Economist in the Office of Europe and Eurasia, heard 
pessimistic views of the current economic situation. 
Although the current account deficit declined almost to zero 
in January, maintaining a budget deficit of less than three 
percent is likely to require painful measures such as public 
sector wage cuts.  Though the GOL's Finance Ministry 
developed the 2009 budget using predictions of an approximate 
five percent contraction in GDP, one economist predicted the 
contraction would be closer to nine percent.  (Note:  On 
March 24, the Finance Ministry revised its prediction to a 
10.4 percent contraction this year.)  The GOL perceives that 
the EU and its institutions either aren't interested or 
aren't well funded enough to help.  Lithuania may appeal for 
aid from the IMF in the next two months but is reticent due 
to public perceptions that this would be an admission that 
the country is in dire straits.  Unlike the last financial 
crisis to hit the region in the late 1990s, Lithuania's 
exports do not have the Central European market as an 
alternative to Russia.  Furthermore, unilateral euroization 
does not appear to be a likely response by the GOL to the 
crisis. 
 
DEFICIT IS GROWING 
------------------ 
 
¶2.  (SBU) Lithuania had a minuscule current account deficit 
(CAD) in January of about 70 million LTL (about 28 million 
USD) according to Reinoldijus Sarkinas, the Chairman of the 
Board of the Bank of Lithuania.  He estimated that the CAD 
for 2009 will be between five and six percent of GDP, with no 
increase in 2010.  Sarkinas told A/DAS Meyer that the 
approved GOL budget for 2009 forecasts a deficit of 2.5 
percent of GDP.  He added that under present conditions it 
would be tough to maintain this deficit level and expected 
revised estimates from the GOL.  If pushed, Sarkinas said 
very unpopular measures like wage cuts for public servants 
could be instituted by the GOL, allowing it to keep a deficit 
of between 2.7 and 2.8 percent of GDP. 
 
¶3.  (C) The Ministry of Finance estimated a contraction of 
4.8 percent of GDP when constructing the 2009 GOL budget. 
Gitanas Nauseda, Advisor to the CEO of SEB Bank in Lithuania, 
told Meyer that he estimated a contraction of 9 percent of 
GDP this year.  Nauseda said the GOL would have to reduce 
salaries for teachers, professors and health care workers in 
order to save the approximately 3 billion litas (about 1.2 
billion USD) the government views as necessary to keep the 
budget deficit under three percent. 
 
THE EU ISN'T HELPING 
-------------------- 
 
¶4.  (C) From Lithuania's standpoint, the EU either cannot or 
will not help.  The European Central Bank and the European 
Commission will not change the standards for euro accession, 
according to Sarkinas.  Mykolas Majauskas, advisor to PM 
Kubilius on economic issues, told Meyer that the GOL does not 
expect the EU to make an exception to the entry requirements 
for Lithuania to get into the Eurozone but said what is 
needed is a "psychological and/or political signal" that 
would publicly encourage the GOL to keep state finances in 
order to get to the euro sooner.  Majauskas added that the 
GOL had asked the ECB to create credit swaps for Lithuanian 
debt.  He also said he has difficulty accepting the current 
arrangement between the EC and the IMF whereby non-Eurozone 
countries, like Lithuania, have to go via the EC/EU to obtain 
IMF help.  Majauskas said the EC should "step up" and provide 
monetary support to non-Eurozone EU members. 
 
GOL MAY TURN TO THE IMF 
----------------------- 
 
¶5.  (C) A/DAS Meyer told several interlocutors that seeking 
IMF aid at this point could be positive for Lithuania and 
emphasized that the EU needs to support an increase in 
funding for the IMF's New Arrangements to Borrow (NAB) as 
well as provide more support to Central and Eastern Europe 
(reftel).  The GOL is still reticent to turn to the IMF. 
Sarkinas said that the GOL had some preliminary talks with 
the IMF and EU institutions and then added that Lithuania may 
not be able to determine until May or June if it needs 
external support.  He confided that the Lithuanian populace 
is likely to view borrowing from the IMF as a sign that the 
GOL is admitting the country is in a dire financial 
situation.  Vadimas Titarenko, Advisor to the CEO for DnB 
Nord Bank, estimated that the external financing need for the 
GOL would be between five and ten percent of GDP or roughly, 
according to our calculations, between 2.2 and 4.4 billion 
USD. 
 
¶6.  (C) Majauskas paralleled Sarkinas's thoughts when he told 
Meyer that the IMF is an economic/financial tool but does 
little to address the public's need to understand the 
economic situation.  He would like to see the IMF provide 
political support by helping the public to understand that 
the economic conditions faced by IMF members who take aid 
require actions that can result in economic constriction and 
social pain.  Majauskas said that instead the IMF is 
perceived as "faceless economists who ask for things" from 
governments who don't want to make these choices. 
 
EXPORT MARKETS SHRINKING 
------------------------ 
 
¶7.  (C) Titarenko told Meyer that if one excludes products 
from Mazeiku Nafta, the large Lithuanian oil refinery, 22 
percent of Lithuanian exports go to Russia.  He added that 
the GOR had announced a predicted contraction in GDP of 2.2 
percent for 2009, but said that according to the Russian 
Minister of the Economy (his Moscow State University 
classmate) the contraction could be as high as ten percent. 
This does not bode well for Lithuanian exports.  Ricardas 
Kasperavicius, the Head of the Macroeconomics Division of the 
Finance Ministry, told Meyer that unlike during the Russian 
financial crisis of the late 1990s, Lithuania cannot send its 
exports that were destined for Russia to Central Europe 
because economies there are doing so poorly. In addition, 
Titarenko reminded Meyer that Latvia, Lithuania's second 
largest trading partner, could have a twelve percent 
contraction in GDP for 2009. 
 
EUROIZATION IS NOT AN OPTION 
---------------------------- 
 
¶8.  (C) In his meeting with Majauskas, Meyer said he told his 
EU and IMF colleagues that the USG would like to see them 
consider more flexible or accelerated euro introduction in 
non-Eurozone members.  Later, Foreign Minister Vygaudas 
Usackas told Meyer, without prompting, that there is a school 
of thought that euroization would provide stability but said 
that the GOL could not make this decision.  Usackas insisted 
that the government's austerity plan could assure the fiscal 
discipline necessary for Lithuania to meet the Maastricht 
criteria.  Nauseda discounted the option of unilateral 
euroization by the GOL, when questioned by Meyer.  He said 
that countries that did this in the past were smaller than 
Lithuania and weathered the fury of the ECB within 6 to 9 
months.  Nonetheless, these countries were not members of the 
EU, like Lithuania, and thus the consequences the GOL could 
face are much more severe, including a cut off of EU 
financial support.  Nauseda insisted that Lithuania would 
maintain its link to the euro until euroization took place 
via officially sanctioned means, a position echoed by 
Sarkinas. 
 
COMMENT 
------- 
 
¶9.  (C) Despite the GOL having taken (mostly) the right steps 
to balance its budget, the increasingly gloomy outlook for 
the Lithuanian economy leads us to believe it could turn 
officially to the IMF in the near- to medium-term.  But 
because of concerns over a negative public reaction, it will 
not do so unless and until it has no other choice. 
 
CLOUD