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Latvia is to use part of the proceeds from the $1.25bn bonds it issued last week to pay down the International Monetary Fund loan it secured during the crisis ahead of term, the finance ministry said on December 10, earning praise from the international lender.

Taking advantage of the ongoing emerging market bond rally, recent upgrades from both Fitch Ratings and Standard & Poor's, and better-than-expected economic growth which has seen the country growing at the quickest rate in the EU so far in 2012, Latvia reported strong demand from investors when it sold the sovereign bonds on December 5.

The finance ministry saw yields on the benchmark seven-year issue tighten to 2.889%, a stunning step up from the 5.375% that Riga paid on a five-year issue in February, and Latvia's lowest ever cost of borrowing on international markets.

It will now use a chunk of the cash raised to roll over the 603m (LVL503m, €722m) in special drawing rights outstanding to the IMF, the finance ministry told Nozare.lv. The early repayment will clear the debt to the Washington-based lender this year, Riga added.

Latvia turned to the IMF and European Union in 2008 to negotiate a €7.5bn bailout following the collapse and rescue of the country's second-biggest bank, Parex. In the end, Riga drew down only €4.4bn of the facility. Under the original schedule, the final repayment of outstanding loans from the IMF would have taken place in 2015.

"Latvia can take the next step and repay the entire IMF loan before term," Finance Minister Andris Vilks declared. "This is an important milestone for the entire Latvian economy, as well as for foreign investors, because by this Latvia confirms its ability to keep its finances in check. As a result of the deal, Latvia will save several millions of lats that will not have to be spent in interest payments but could be invested in the development of the country."

Later, in a comment on Twitter the minister grew somewhat acerbic as he bathed in the country's recent successes following the years of harsh austerity that followed the nosedive of the economy in 2009. "Just a while ago, there were many smarty-pants claiming that Latvia would have to carry on with the IMF loan program for years, or even that Latvia would not be able to repay the loan," Vilks wrote.

The IMF's Christine Lagarde welcomed the announcement of the early repayment in a statement. "I welcome Latvia's decision to repay early its outstanding obligations to the Fund," the managing director said. "The rebound from the crisis is the fruit of the steadfast efforts made by the people of Latvia and its authorities, with whom we look forward to continuing a close and constructive relationship."

In the immediate wake of the recent bond issue, Vilks had pointed out that it would allow the country to continue to leverage the improved economy, credit rating upgrades and market rally to reduce the cost of outstanding debt. "As Latvia's credit ratings improve, we have a unique opportunity to refinance our external debt on international financial markets, at an interest lower than that at which we borrowed from the European Commission during the international loan program," Vilks told Leta on December 6. "As a result, the cost of servicing the state debt will reduce in the medium term."

Latvia made an early repayment of LVL152m in September. It has also said that it is mulling issuing a Samurai bond next year, joining a trend kick started by Poland this year, and attracting the likes of Slovakia, the Czech Republic and Croatia.