(Adds Dombrovskis quotes, market rates)
RIGA, June 3 (Reuters) - Latvian Prime Minister Valdis Dombrovskis came out on Wednesday strongly against a devaluation, which he said would be a shock affecting everyone.
But he saw big problems if parliament failed to back budget cuts the government plans to secure a further 1.2 billion euros of loans in July from a 7.5 billion euro rescue agreed with the International Monetary Fund (IMF) and European Union (EU).
He also said his country could adopt the euro in 2013 at the earliest, though the central bank has wanted 2012 as the goal.
"A devaluation of 30 percent...would mean that the value of people's savings and real incomes would very quickly fall much further than the budget cuts we are carrying out," he told public radio in an interview.
As the economy now faces a drop of 18 percent this year, some analysts have suggested that a devaluation of the lat currency, which is pegged to the euro, would be less painful.
A former prime minister, whose party is the biggest in the four-party ruling coalition, has also backed this idea.
In an interview to newspaper Diena, Dombrovskis said the cost of imports would immediately rise in a devaluation.
"At the same time, the immediate shock that will happen will affect absolutely everyone and everything," he added.
Budget cuts were vital to win further IMF and EU funding.
"If there no amendments (in the budget) then we will have problems, one could say, big problems," he told Diena.
Only if someone wanted to bring Latvia to a devaluation would they play "play games" with the budget, he added.
Latvian interbank rates spiked this week and the lat has stayed at the weak end of its pegged band against the euro due to devaluation fears as the economy is set for a deep slide.
TENSE MARKET
Swedish bank shares and the Swedish crown have also fallen due to worries about Swedish bank exposure to Baltic markets.
"Overnight rates have gone higher than yesterday, and RIGIBOR will probably be set higher than 16 percent, which would be a new record," said Nordea Markets analyst Andris Larins.
"At the same time, the question is even if you are ready to pay 16 percent or higher whether you would be able to actually borrow that money," he said.
He said the market would remain tense until clarity emerges on the budget, on further loans from the IMF and EU and after local elections this weekend, which have raised political uncertainty and led to a slower pace of budget changes.
Dombrovskis told Diena that under the IMF programme the government did not commit to adopt the euro in 2012, but to meet the Maastricht criteria in 2011 by having a budget deficit under 3 percent of GDP.
"This rhetoric about introducing the euro in 2012 can be heard very often. It is not really clear to me on what it is based," he said.
"The earliest is 2013 (to adopt the euro)," he added, though he noted that a deficit of 3 percent of GDP was a medium-term goal and this could also be met in 2012. The central bank, on the other hand, has said the goal is to adopt the euro in 2012.
He said that the government no longer wanted to have to aim for a deficit measured as a percentage of GDP as the GDP forecast kept being reduced. Instead, he wanted to aim for an amount of reductions the government had to make. (Reporting by Patrick Lannin; Editing by Kim Coghill/Victoria Main)