Latvia has become the second European Union country to seek the International Monetary Fund’s (IMF) help to stabilize its financial system. It is also asking for help from the European Union. The Latvian Prime Minister said the sum needed would be decided by talks with the IMF and EU. Latvia has fallen into recession and recently nationalized the country’s second-largest bank. The government invested $ 353 m into the Parex bank to help it survive after a run on its deposits. It also offered $ 877 m in guarantees to its creditors. Latvia’s economy, which grew by 50% between 2004 & 2007, Shrank 4.2% in the third quarter of this year, the sharpest economic contraction in the European Union. The Latvian Government has already started talks with the European Commission, the executive branch of the EU, on a possible rescue package for its economy. The IMF has said it has $ 200 bn set aside to help out countries facing turmoil because of the current global financial crisis. It has also said it expects to provide help for some 24 countries.

Learning Objectives

1) What measures can the European Union take in order to undo the economic contraction?

2) What is the role of the IMF towards the countries that have fallen into recession?

3) In what ways can Latvia use the financial aid from the IMF to stabilize its financial system?

4) Explain the term Economic Recession in detail.