Baltic central banks ante up for euro

  • 1999-01-07
  • Sandra L. Medearis
RIGA - Eleven currencies started the journey to showcases for collectible bank notes on Jan. 1 as the euro became the common currency of all but four countries in the European Union.

EU countries talked about a common currency for 40 years and laid concrete plans for the conversion in 1991 with the Maastricht Treaty. Denmark, Great Britain and Sweden have not gone along with the plan. Greece fervently wanted to participate but did not qualify.

For now, the currency of the European money system will be a virtual currency, because no euro coins and notes will circulate until Jan. 1, 2002. Meanwhile, Europeans will continue to spend traditional domestic currency.

The closest to euro cash now is an euro traveler's check launched Jan. 1 by Thomas Cook agency, provider of traveler's checks in 12 other currencies. Others are sure to follow.

While banking and stock houses worked in a flurry over the weekend in "Euroland," coined by press in a headline field day, to put the final touches on conversions at an estimated cost of $150 billion, Baltic money systems have been implementing changes also, but gradually.

Still, even in the early stages of adoption, the euro has countries outside the EU bloc preparing for effects on their international trading, finance and other cross-border exchanges.

The Baltics, hoping for EU membership, will see direct and indirect impacts of the euro's advent. Those trading with the European Union will be directly affected in situations where the euro replaces the dollar as a foreign currency and when they have to do transactions in domestic and common currencies. In affecting world capital markets, the euro is likely to influence the flow into the Baltics of foreign investment, which reached 9.3 percent of Latvia's GDP in 1997.

"The 11 economies will form a single financial market that will grow more liquid and transparent and thereby more attractive," said Einars Repse, Latvia's central bank governor. But the need to diversify investment will become limited in the euro area and increase investment interest in Central and Eastern Europe, he added.

A goal of the euro introduction is to decrease the cost of currency exchange and to reduce the risk of rate volatility, which may encourage the 11 countries to trade more among themselves and less with partners outside the EU. But economic growth within the EU might at the same time promote access of outsiders to the EU markets, said Repse, who observed that a common currency will promote price transparency favorable to outside trade partners.

Latvia has 54 percent of its trade with the EU, but a third of that is with the euro dropouts Great Britain, Sweden and Denmark. This makes Latvia less dependent on the stability of the euro currency. Latvia's foreign trade is 80 percent of its GDP, with 47 percent of its trade in U.S. dollars and 33 percent in the 11 euro currencies.

Indirectly, Baltic countries have been putting themselves in position to participate in the European Money Union when EU membership becomes a reality. They are setting their international status and procedures to conform with practices of the European System of Central Banks.

"Pre-accession countries will have to adjust their economic and money policies to the strict principles set out by the Maastricht Treaty, and this will constitute the indirect impact of the euro project on Central and Eastern Europe," Repse told a financial conference in Lisbon.

The European Union 11 irrevocably pegged their currencies to each other and to the euro on Jan. 1. Conversion rates set in concrete are effective with different exchange rates for each of the 11 national currencies.

Latvia, Estonia and Lithuania may eventually join the gang by pegging their currencies to the euro.

Bank of Latvia stopped quoting the Europe payment unit rate for the lat and started to quote the euro rate Jan. 5, but continues to peg the lat to a basket of currencies.

Legally able to peg to the euro, the Bank of Latvia may do so in the future but there is no rush. First comes careful consideration of consequences to the lat's continued stability, and that half the country's trade is in dollars.

Estonia's central bank, Eesti Pank, will retain the Estonian kroon's exchange rate against the German mark at its present level, 8 to 1.

On Jan. 1, Estonia's currency board fixed the kroon against the euro consistent with the conversion rate of the German mark against the euro determined on Dec. 31 to an accuracy of six decimal places.

Otherwise, Estonia will not deviate from its monetary policy based on the currency board and fixed exchange rate.

An amendment to legislation necessary to replace the mark with the euro will not be an attempt to alter the exchange rate, bankers said.

When the anchor currency is changed, the rate will hold to the eight-to-one rate of kroon to mark. The euro will take its place beside the mark in exchange rate quotes, with Eesti Pank treating the euro and mark equally, without a spread, in foreign exchange transactions with commercial banks.

The Estonian currency board is sold on the euro, seeing it as a positive influence of external environment on Estonia's economy.

"Taking into account the continuing integration of Estonia into European economy, the introduction of the euro enhances the prospects of local economy," Eesti Pank said. Openness and efficiency of the financial system of EMU member states should increase integration of Estonia's financial sector and real economy into the European capital markets.

As the Latvians, Estonian businessmen will have to meet increasing competition in the European market, meaning that Estonia will have to continue a stable market policy, surplus budget included.

The Bank of Lithuania is eying the euro carefully, doing risk assessment on large foreign exchange and precious metals exposure. Commercial banks began on Jan. 1 to recalculate net value of bank assets, off-balance sheet claims and bank-sheet and off-balance sheet liabilities denominated in the national currencies of the EMU states in euros. The central bank has directed the banks also to assess large exposures in euros.

Lithuania's central bank has ordered commercial banks to recalculate operations in the national currencies in euro terms and then to register these operations in the accounts in litas, according to the litas-euro exchange rate.

Forms showing interest rates and other information for customers will also include data in euro terms as well as in U.S. dollars, litas, the national currencies of EMU states and other countries.

On Jan. 1, 2002, euro notes and coins will take their places along side liras, francs, pesetas, marks, and other currencies. They will comingle in wallets and coin purses for six months until July 1, when the euro will become the only legal tender in the 11 first-wave euro countries.