June 29, 2009 / 12:20 PM / 8 years ago

ECB warns on Latvia plan to siphon c. bank profits

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FRANKFURT, June 29 (Reuters) - The European Central Bank has urged Latvia to rethink plans to siphon off half of its central bank's profits to help rebuild the country's battered finances.

Latvia's government plans to up the amount of central bank profits it takes, to 50 percent from the current 15 percent.

In a legal opinion published on its Web site on Monday, the ECB warned the move risked hurting Latvian central bank independence and wiping out funds designed to be a financial safety net for country's troubled banks.

"The use of central bank financial resources may be counterproductive from the credibility point of view if confidence in the financial stability and independence of the National Central Bank is undermined," the ECB said.

"It is important to shield the rules related to the distribution of profits from third-party interests and to ensure a legal framework that provides a stable and long-term basis for the central bank's functioning."

Latvia is hoping to avoid state bankruptcy and devaluation of its currency as it struggles to cope with the financial crisis.

The ECB warned the plan to divert central bank profits could leave the Latvian central bank in deep financial water, owing more than its assets are worth.

"In principle it is not optimal for the central bank to create reserves only after transferring a large portion of its profits to the Treasury," the ECB said.

"Should Latvijas Banka run into a situation of negative equity in the future (i.e. losses exceeding currently accumulated reserves), it would be hard to rebuild it out of the stream of future `net' earnings under such an arrangement."

(For ECB legal opinion please go to ECB Web site here)

(for recent story on Latvia receiving funds from EU please click [ID:nLQ413480])

Reporting by Marc Jones; Editing by Victoria Main

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