Today, the European Commission (Commission) and the Ecofin Council (Ecofin) issued a joint statement announcing its intention to grant the Latvian government medium-term financial assistance up to €3.1 billion in the form of a European Community loan. The terms and conditions of the loan will be finalized in a Memorandum of Understanding between the European Union and the Latvian government. The loan is offered pursuant to Council Regulation 332/2002, “which provides for a medium-term financial assistance facility for non-euro area EU Member States’ balance of payments,” and is expected to receive approval from the Commission and the EU finance ministers in early 2009.

The IMF also announced today its plans to lend €1.7 billion to Latvia under the terms of a 27-month Stand-By Arrangement. Late last month the IMF had indicated that it was discussing possible aid with Latvian authorities. The loan still remains subject to approval from the IMF Executive Board under the IMF’s Emergency Financing Mechanism.

The Commission and Ecofin noted in their joint statement that additional aid would be provided to Latvia from the Nordic countries (Sweden, Denmark, Finland and Norway) in the amount of €1.8 billion, the World Bank in the amount of €0.4 billion and the European Bank of Reconstruction and Development, the Czech Republic, Poland and Estonia collectively in the amount of €0.5 billion.

Financial assistance from the European Union to Latvia will be conditioned on “the implementation of a comprehensive economic policy” program. The program is “based on maintaining Latvia’s existing exchange rate peg, which will remain a key policy anchor going forward, thereby underpinning systemic stability.” Some key elements outlined in the Commission and Ecofin’s announcement regarding the economic policy package “are an immediate and sustained fiscal consolidation to limit the budget deficit to 5% of GDO in 2009, falling further to 3% of GDP in 2011, in addition to adopting measures to restructure domestic and external debt.” The Commission and Ecofin also noted that the adoption of these measures would help the Latvian economy meet the requisite conditions for converting to the euro.

Mr. Dominique Strauss-Kahn, Managing Director of the IMF noted that, “[u]nder the [IMF aid] program the Latvian authorities are implementing a strong package of policy measures aimed at stabilizing the economy” and the financial sector. He also stated that “[w]ith Latvia’s commitment to strengthened economic policies, we expect that banks and other financial institutions operating in the country will continue to provide adequate financing, and the key players have made commitments to this effect.”

Last month the Commission announced its approval under EC Treaty state aid rules of the Latvian government’s bailout of JSC Parex Banka, the country’s second largest commercial bank.