IMF urges Latvia to keep eye on foreign-held deposits

RIGA Mon May 13, 2013 10:41am EDT

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RIGA May 13 (Reuters) - Euro zone hopeful Latvia has taken steps to insure itself against problems from foreign deposits at its banks but needs to keep a close eye on the thriving sector, the International Monetary Fund (IMF) said on Monday.

European Central Bank officials this year warned Latvia that accepting large flows of funds from crisis-hit Cyprus, traditionally a home for offshore Russian money, might impact the country's bid to join the euro zone in 2014.

"One has to continue to be very vigilant and keep this sort of intensive supervision," Shekhar Aiyar, head of an IMF mission to Latvia, told reporters.

Latvia, a former Soviet state, has also positioned itself as an offshore financial centre for Russia and non-resident deposits comprise almost 50 percent of all the 12.8 billion Latvian lats of deposits in the sector.

The authorities have said they have only detected about 100 million euros of funds flowing from Cyprus, and Aiyar also said the Fund had not detected "substantial substitution" of bank deposits from Cyprus to Latvia.

Still, ratings agencies Moody's and Fitch recently said that Baltic state's banking sector was vulnerable.

The IMF said in a statement after the mission that recent regulatory and supervisory measures, such as increased capital and liquidity requirements for banks who specialize in non-residents deposits, would help contain risks.

Potential problems include a drain on international reserves in the event of outflows, but the Fund said Latvian banks servicing the non-resident sector had fairly liquid foreign assets.

Aiyar stuck to the Fund's earlier view that the Latvian economy was set for roughly four percent growth this year, though the risks were on the downside. (Reporting by Aija Braslina; Editing by Toby Chopra)

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