Riga  - The Latvian government might have thought its announcement on November 20 that it was in talks with the International Monetary Fund (IMF) and the European Union (EU) to support its economy would provide confidence to the population of the small Baltic republic and investors alike.

Instead, rumour and counter-rumour have been sweeping Latvians and policy-makers along at an increasing pace.

In an attempt to defuse the situation, the finance ministry appears happy to use words it wouldn't even utter until recently - words like "devaluation" and "bankruptcy".

Finance Ministry spokeswoman Diana Berzina told Deutsche Presse- Agentur dpa Monday that talks involving Latvia, the IMF and the EU were continuing in the Latvian capital, Riga.

"There is no emergency," Berzina said. "Latvia is not in the same position Hungary and Iceland were when they needed immediate financial help. Our government is now preparing a macroeconomic plan in which certain targets will be set to stabilize the situation.

The plan should be ready by the end of the week, and possibly by Thursday afternoon, Berzina said. It would include fiscal policy, help for producers and the use of European structural funds. Only when a complete plan had been drawn up would the government begin to talk about the sums required, she added.

"The Latvian press think it should be the other way round - first you ask for an amount of money and then decide what to do with it, but our government has decided to do it from the beginning to the end and only then speak about amounts," Berzina said.

"Rumours play a big part in the financial sphere. There were lots of rumours last weekend and they have been growing and growing but hopefully at some point they will have the opposite effect when there are so many rumours no-one actually believes them any more," she added.

However, the government must shoulder some of the blame for setting the current rumour mill in motion.

Having witnessed the surprise nationalization of Parex Banka, the country's largest indigenous financial institution, a few weeks earlier on November 8, an increasingly frightened public is starting to feel it isn't getting all the facts.

When Finance Minister Atis Slakteris mentioned that talks with the IMF and EU had already been under way for some time on an unofficial basis, many Latvians took it as further evidence they had been kept in the dark.

Several banks have reported savers changing the local currency, the lat, into euros as devaluation rumours become an almost daily occurrence, despite repeated denials from government and central bank officials.

On top of all that, police arrested lecturer Dmitrijs Smirnovs in the western Latvian town of Ventspils on charges of attempting to destabilize the national economy last week after he recommended swapping lats for dollars during a public debate, which in turn sparked outrage in the press about freedom of speech seeming to come under attack.

Given an absence of detail about the likely size of the assistance package Latvia will ask for, it is hardly surprising that commentators and economists are making their own estimates.

"If one adds up a couple of figures, like the loans Parex has due next year at 700 million euros, plus negative GDP growth of around 4 per cent, we get close to 1 billion euros, but it is very hard to say how much money will be needed," Anssi Rantala, an economist with Nordea bank told dpa Monday.

Rantala was in Riga to deliver Nordea's latest Baltic Rim Outlook report, which painted a grim picture of Latvia's short to medium term outlook.

"In order to navigate through the rough times without a major currency crisis, the labour market needs to show flexibility," Rantala said.

If inflation turns out to be more persistent than projected and unemployment rises sharply, the lat's currency peg to the euro could be threatened, he told journalists.

"Devaluation could be used in a desperate attempt to save the economy from a total crash. As over 80 per cent of private sector loans are in euros, a sizeable devaluation would mean a marked increase in debt servicing costs for an average debtor with income in local currency," Rantala concluded.

Though Rantala stressed devaluation was still unlikely, the fact that such a scenario exists may go some way to explaining why fear and rumour are finding fertile soil in Latvia at present. (dpa)