VILNIUS, Nov 3 (Reuters) - The prime minister-elect of Lithuania said on Monday the Baltic state had to face the "painful reality" of worsening public finances and slash spending to avoid the fate of crisis-hit Iceland.
Andris Kubilius is holding coalition talks to form a new centre-right government for Lithuania after his Homeland Union-Christian Democratic Party came first in recent elections.
"Our main job now is to face reality ... Our challenges are crystal clear: national budget spending could exceed revenues by 6 billion litas ($2.24 billion) next year, and questions remain whether it will be possible to refinance 3 billion (litas) of debt," he wrote in his Internet blog.
"The only answer to such a dramatic reality is to slash spending radically ... It is better to face painful reality today, than the catastrophic reality of Iceland next year."
Iceland fell into crisis when its top three banks folded in the face of liquidity problems and high debts, and its currency crumbled. It expects a drop of 10 percent in economic output next year, rising unemployment and worsening public finances.
The outgoing centre-left government has sent a draft 2009 state budget to parliament with a deficit of 2.7 billion litas.
It has said the consolidated public sector deficit could reach 2.9 percent of gross domestic product (GDP), dangerously close to the EU deficit ceiling of 3 percent of GDP.
But Kubilius said the deficit could be bigger than the government is forecasting, saying that Finance Ministry growth forecasts of 1.5 percent for 2009 were too optimistic.
"In the past we could go and easily borrow on foreign markets to refinance debt, but whether it would be possible to do that next year remains difficult to answer today, but that is at least doubtful," Kubilius said.
"In the meantime it is practically impossible for the state to borrow on foreign markets ... and a deficit budget would mean we would be forced to do that.".
Lithuania has twice postponed this year a new 400 million euro Eurobond issue due to global financial turmoil.
Kubilius said he and his centre-right coalition partners have already found ways to cut the budget deficit by some 3.5-4 billion litas.
Kubilius, 51, was prime minister in 1999-2000, when Lithuania was also forced to cut spending when exports and budget revenues were hit by the Russian financial crisis. (Reporting by Nerijus Adomaitis, editing by Patrick Lannin and Andy Bruce)