November 22, 2011 / 2:26 PM / 6 years ago

UPDATE 3-Latvia reassures on banks as debt sale halted

* Latvia cancels debt sale due to market nerves as bank suspended

* Prosecutors open criminal probe, detain bankers

* Banks’ supervisor says 100 mln lats missing

* Central bank reassure on other banks (Adds size of missing assets, prosecutors, PM)

By Aleks Tapinsh

RIGA, Nov 22 (Reuters) - Latvia cancelled a sale of 10-year bonds due to increased investor nervousness after regulators suspended a mid-sized lender, but denied on Tuesday that it was facing a systemic banking crisis.

The actions carried unwelcome echoes of the financial turmoil of 2008 that tipped all three Baltic states into brutal recessions, but one analyst said there was no underlying cause for alarm at this stage.

Late on Monday, Latvia ordered the suspension of Latvijas Krajbanka, the country’s sixth-largest deposit-taker, after uncovering a shortage of funds there.

Last week neighboring Lithuania took over bank Snoras, its third largest depositor, which owned 68 percent of Krajbanka.

The FKTK bank supervisor said on Tuesday that 100 million Latvian lats ($191 million) was missing from Krajbanka.

Ilmars Rimsevics, Latvia’s central bank chief, told public radio the closure of Krajbanka would have little “systemic influence”, because the bank had only minor obligations to other banks.

Latvia’s banking sector is dominated by Scandinavian banking groups, such as Swedbank and SEB.

“We do not see anything dramatic this time,” he added.

During the last crisis, Latvia had to rescue its second-largest bank Parex and needed a 7.5 billion euro international bailout.

But Krajbanka, the 10th largest bank by assets, has a long history and a wide branch network, particularly in rural areas.

Latvian media reported that some towns faced particular difficulties as Krajbanka supplied their sole cash machines.

Latvian Prime Minister Valdis Dombrovskis and the banking supervisor said they expected Lithuania, now major shareholder of Krajbanka, to get involved.

“We will await until the Lithuanian government invests capital into the bank the same way as did the Latvian government (into Parex),” Irena Krumane, the head of the banking oversight body FKTK, told journalists.

Dombrovskis, due to meet with his Lithuanian counterpart Andrius Kubilius on Friday, said he expected the Baltic neighbor to “act responsibly”.

Krumane added: “If... Lithuanian government decides to liquidate Snoras Bank, correspondingly we will have to consider liquidate Latvijas Krajbanka.”

In that case the state would have to compensate about 237,000 savers eligible to receive deposit insurance of up to 100,000 euros from the guarantee fund.

The fund currently has 149 million lats, and if that falls short, the fund would have to borrow from the government, Krumane said.

Since Lithuania seized Snoras, the cost of insuring both Latvian and Lithuanian five-year debt has risen since by about 20 basis points.

The Latvian Treasury said its cancellation of its planned sale of 10 million lats in 10-year bonds on Tuesday would have little impact on state finances with 1.2 billion lats at its disposal.

The former owners of Snoras and Krajbanka have denied any wrongdoing and threatened legal action. ($1 = 0.5235 Latvian lats) (Additional reporting by Patrick Lannin in Stockholm; Editing by John Stonestreet/Ruth Pitchford)

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