Investors get jitters as Latvia pledges not to devalue the lat

Investors are nervously watching Latvia as the Baltic state pledged this week that it would not devalue the lat, its national currency, amid growing financial jitters.

Latvia has been affected more severely than any other EU country by the financial crisis, and in December was offered a €7.5bn (£6.6bn) rescue package led by the IMF and the EU. Since then, the economic outlook in the country of 2.2 million has deteriorated. The latest €1bn instalment of the package has been held up as the Latvian government tries to cut public-sector wages in order to help the budget deficit. EU and IMF officials were in Riga, the capital, this week to discuss the cuts.

"A breakdown in the relationship with the IMF and EU would leave Latvia facing a substantial budget and external financing gap," Fitch Ratings said in a report this week. "Such a situation would be likely to precipitate a devaluation of the lat."

The situation prompted violent anti-government protests in RigaEarlier this year. Forty people were injured and the government resigned, but the new coalition is also under pressure. The economy is set to shrink up to 20 per cent this year.