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Monday 23.07.2018 | Name days: Magda, Magone, Mērija

Economic Diary. Latvia. Euro – to be!

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The government adopted the law regarding transition to the united European currency this week. This finally sets the rules of the game, ones Latvia will be following starting from 2014. This also puts an end to the discussion on whether or not Latvia will introduce Euro.

Euro – to be!

Finance Ministry keeps on repeating: everything is planned to make sure the transition process from Lat to Euro is as seamless as possible for the average Latvian. Under the condition that all of his funds remain on his bank account on January 1, 2014, the average Latvian will not feel a thing: Lats will be automatically converted to Euro. Any remaining cash will be allowed to be converted to Euro in any bank with no commission pay within six months of the currency transition process. Places where credit institutions are not too active will be serviced by Latvian Post, but only for one month. The period of parallel currency activity will be shorter than that of countries that joined Eurozone before Latvia. Nonetheless, as the Finance Ministry reports, there is point in this: experience of those who came before shows that 95% of the population exchange the currency within the first 10-12 days.

However, transition to Euro will not be as seamless for businessmen. Prices will need to be stated in both currencies (LVL and EUR) during the first three months, as well as maintain this practice for six months after the initial currency transition. President of the Latvian Traders Association noted that this initiative will cost the industry representatives 16 million LVL. General expenses, according to him, could reach 160 million LVL. These expenses will need to be covered by the private sector using its own wallet: the draft law adopted this week states this clearly. Furthermore, the document states annual accounts will need to be stated in Euro from the start, as well as related data for the previous period.

Nonetheless, no matter how tiresome Euro adoption may be, merchants prefer clarity. There has not been much of it regarding the precise transition period. Now, on the other hand, all the rules have been set and business can begin its preparation.

Provocative marketing

While the Latvian government prepares the soil to join the Eurozone club, Latvian food producers are more concerned with defending Latvian products and initiated the campaign called “Don’t buy foreign things!” 17 firms have already joined this initiative. Among them are – Zemitāni, Lāči, Karavela, Mūsmāju dārzeņi, Latvijas piens, Rēzeknes gaļas kombināts, Užavas alus, Vinnis, Valmiermuižas alus and others.

Work with society began with a rather provocative video on YouTube. One of its authors, a well-known local creative resident Eriks Stendzinieks, believes all European countries are trying to protect their local producers, while Latvia, on the other hand, has a priority of following European directives. This is why there was great need of an initiative, to create a base for a future discussion. Currently, the goal of the campaign – is to address the flaws of public procurement regulations, to make it more protective of local business.

It should be noted that calls for buyers’ patriotism are quite often nowadays. For example, the Be American, Buy American movement became very popular. Times notes that the proportion of US residents that prefer local products grows every year.

Time to protect borrowers

Another topic that was particularly popular this week – the introduction of amendments to the Latvian legislation to protect the interests of mortgage borrowers. The Justice Ministry stepped forth with this proposal during the meeting of State Secretaries. The current legal system, according to the institution, is not secure enough for residents who buy real estate property using loans.

Particularly, authors note that credit institutions demand excessive additional precautions from borrowers during or after the issue of loans (financial guarantees, bail, separate payments). Current normative acts almost do not limit banks in making such decisions: they cannot turn to them only if the amount of bail was reduced because of changes on the real estate market. With that, the Justice Ministry offers to expand the list of cases when creditors are not allowed to present borrowers with exaggerated precaution requirements. Furthermore, the authors of the report call to increase the assessment quality of real estate value: inadequately low value could force the bank to request additional guarantees from the borrowers.

The information report states separately the problem of interest rates on credits, as well as fines. According to the Justice Ministry, the size of fines is not limited in any way. The institution offers to state the criteria of how rates are determined in contracts, as well as introduce the maximum sanction volume in the event of failure to fulfil obligations (to make sure that it does not exceed the general amount of the loan). Furthermore, it is proposed to obligate the creditor to cooperate with the borrower – particularly to set a mandatory moratorium on the adding of fines during the review of the borrower’s submitted plan to restructure obligations.

The Latvian Commercial Banks Association agrees that the country needs legislation that would regulate the sphere of mortgage crediting. The association does note, however, that the statements of the Justice Ministry have a more or less open populist undertone. For example, this relates to the statement regarding multiple and exceeding requirements on providing guarantees that cannot be backed by analysis or statistics.


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