ECB: Latvia ready for the euro

Picture: Reuters.

Picture: Reuters.

Published Jun 5, 2013

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Frankfurt - The European Central Bank welcomed Latvia on Wednesday as the next member of the euro, the 18th country to join the currency, but said high foreign deposits in its banks were a risk to financial stability.

In its convergence report, the euro zone's central bank said Latvia had met all the criteria to join the common currency. These include low inflation and long-term interest rates, a stable exchange rate and low public debt and deficits.

But it expressed concerns about the high proportion of foreign deposits held in the small Baltic country's banks.

“The reliance by a significant part of the banking sector on non-resident deposits as a source of funding, while not a recent phenomenon, is again on the rise and represents an important risk to financial stability,” the ECB said.

At the end of the first quarter, deposits in Latvian banks from outside the European Union totalled just under 7 billion euros, or about one-third of the country's GDP, ECB data showed.

The data does not show where the deposits come from, but given the country's close ties to Russia, most are believed to come from there.

Large foreign deposits can be a risk to financial stability, as they can be quickly moved away.

Latvia's foreign deposits are much smaller than was the case in Cyprus, whose economy is of similar size and where such deposits accounted for more than 1-1/2 times GDP prior to its bailout earlier this year.

EU sources told Reuters on Monday that the European Commission would give Latvia the go-ahead to join the euro from the start of next year. The ECB is consulted, but only the Commission has the right to make a legal recommendation.

Before the debt crisis, EU member states that were not yet part of the currency union were queuing up to join, but interest has since waned.

Of the countries reviewed in the convergence report, only Latvia and Lithuania have been part of the exchange rate mechanism II (ERM II) for more than two years - a pre-requisite for joining the euro.

The ECB also said Latvia must keep prices in check.

“Maintaining low inflation rates in Latvia will be challenging in the medium term,” the ECB said.

“It may be difficult to prevent macroeconomic imbalances, including high rates of inflation, from building up again.”

Latvia should clarify its national law on central bank supervision by the parliament, the ECB added. - Reuters

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