Lithuanians ditch government in austerity thumbs-down

VILNIUS Mon Oct 15, 2012 4:58am EDT

1 of 2. A man casts his vote in Vilnius October 14, 2012.

Credit: Reuters/Ints Kalnins

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VILNIUS (Reuters) - Lithuania's opposition prepared to take power on Monday after voters rejected a government that won widespread praise abroad for steering its citizens through the financial crisis with heavy budget cuts.

An ex-Soviet state of about three million people, Lithuania crashed hard when the crisis hit four years ago.

It slashed spending in response and, after a brutal recession, is now returning to economic health - but too late for voters who have seen their spending power eroded and unemployment soar.

The centre-left coalition now likely to take over promised during campaigning for Sunday's parliamentary election that it would ease the pain by raising the minimum wage, shifting the tax burden towards the better off and postponing adoption of the euro.

One coalition leader told Reuters the budget deficit might, at a later date, be allowed to go above the level that euro zone policymakers view as prudent.

But the new government will have to walk a tightrope.

Lithuania is still heavily indebted, and if debt markets - which welcomed its predecessor's austerity drive - do not trust the plans to ease the belt-tightening, the cost of borrowing could go up so high the country plummets into another crisis.

Debt markets showed no immediate reaction on Monday.

VOTERS, NOT IMF, HOLD CARDS

With most votes counted early on Monday, it was clear the government of Prime Minister Andrius Kubilius had lost - having won praise from big European powers and the International Monetary Fund for its thrift.

"If the IMF was voting then he (the prime minister) would be re-elected," said Kestutis Girnius, who teaches at the Institute for International Relations and Political Science in Vilnius.

"But the IMF does not live in Lithuania, and they could not live on a Lithuanian salary."

As one of the EU states hit hardest by the crisis, Lithuania was also an early convert to the austerity measures that have become the standard policy response to the debt turmoil that has spread across the region.

Before the crash of 2008, Lithuania was booming. Scandinavian banks provided cheap credit which let the country buy more than it sold and overheated the real estate market.

When the crisis struck, the banks stopped lending. Economic output dropped by 15 percent in 2009, unemployment shot up and thousands of young Lithuanians went abroad to seek work.

The government cut pensions and public sector wages. To save money, only every third street lamp in Vilnius was lit, and fuel for police cars was rationed.

This discipline helped the economy rebound. Gross domestic product grew 5.8 percent last year, one of the fastest rates of any EU economy. The budget deficit has been tamed. Yet most Lithuanians feel worse off than they did four years ago.

"What kind of crisis management are we talking about?" asked Alfonsus Spudys, 78, after he voted on Sunday in the capital, Vilnius. "They scythed people down ... and now they are saying they handled the crisis really well."

With votes counted from about three-quarters of Lithuania's districts, the opposition Labour Party had 21 percent, followed by its likely coalition partner the Social Democrats, with 19 percent.

The prime minister's Homeland Union had 13 percent.

The final outcome will not be clear until a second round in two weeks to settle local races where there was no outright winner, though that is unlikely to change the overall picture.

Algirdas Butkevicius, the former finance minister who leads the Social Democrats and is in the running to be new prime minister, reassured markets that any softening of austerity would be cautious and gradual.

"Our position is not be spending lavishly with borrowed money," he told a news conference on Monday. "First you have to earn money to get higher revenues for budgets."

Labour Party leader Viktor Uspaskich, a Russian-born businessman, said the coalition would stick for now to a deficit under three percent of gross domestic product, but that this could be exceeded later.

Lithuania needs to maintain their confidence, not least because it has to repay a 1 billion euro Eurobond in March.

In a non-binding referendum held alongside Sunday's election, about 60 percent of voters rejected a plan to build a 6.8 billion euro nuclear power station, incomplete results showed. U.S.-Japanese joint venture Hitachi-GE Nuclear Energy was lined up to build the plant.

(Writing by Christian Lowe; Editing by John Stonestreet)

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