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Latvia Clears Path to Apply for 2014 Euro Adoption

Jan. 31 (Bloomberg) -- Latvia passed legislation allowing it to apply for euro-area membership starting in 2014, boosting eastern European support for the embattled currency region.

The Baltic nation’s Parliament, based in the capital, Riga, voted 52-40 today to pass the euro-adoption law in its second and final reading, according to its website.

The move provides further backing to the euro region as it grapples with its second recession since 2009 after Poland and Lithuania said they’d also seek to join. Latvia, which exited a 7.5 billion-euro ($10.2 billion) bailout last year, is vying to follow Estonia by becoming the 18th euro-area member and meets all the criteria it needs to do so, Prime Minister Valdis Dombrovskis told lawmakers today before the vote.

“The passing of the bill is a further positive for Latvian credit, as the country is now one step closer to euro accession in 2014,” Mohammed Kazmi, a London-based analyst at Royal Bank of Scotland Plc, said by e-mail. “We expect the government to now push for an extraordinary convergence report from the European Commission so that the process for joining the euro zone can formally begin.”

Bonds, Swaps

The yield on Latvia’s $1.25 billion bond due 2020 rose about 1 basis point after the vote to 3.02 percent as of 12:26 p.m. in Riga. The cost to insure its debt against non-payment for five years using credit-default swaps fell 5 basis points today to 104 basis points, about 3 basis points more than neighboring Lithuania, data compiled by Bloomberg show.

Estonia was last nation to join the euro region in 2011. While Latvia would be next, if the government’s application is accepted, Lithuanian Premier Algridas Butkevicius announced Jan. 25 that his government would pursue entry in 2015, while Poland will seek to follow suit at a later date, Finance Minister Jacek Rostowski said Jan. 24.

“Euro adoption is the logical next step in implementing our macroeconomic policy framework,” Dombrovskis said today. “We’re already importing euro-zone monetary policy, while not being in the euro zone and not sitting at the decision-making table, and we pay for converting the lats to euros and back.”

‘A Formality’

More than 80 percent of household and business loans are denominated in euros, while more than 40 percent of deposits are held in the currency, according to the prime minister. The Cabinet will submit its euro-adoption bid in February or March, he said last week in an interview in Davos, Switzerland.

Latvia is very close to meeting requirements for adopting the euro in 2014, Violeta Klyviene, a senior analyst at Danske Bank A/S, said Dec. 17 The nation’s inflation, debt and budget deficit already meet membership criteria, leaving only requirements on long-term interest rates that are “more a formality than a real obstacle,” Klyviene said from Vilnius, Lithuania.

Support for adopting the euro was 31 percent in December, up from 26 percent in October, according to pollster TNS. The survey of 1,024 people gave no margin of error.

About 50 people gathered outside Parliament before today’s vote to demonstrate against the proposed currency switch. One of the protesters, Guntra Viksna, called the national currency, the lats, a sign of independence, saying Latvia “isn’t ready for the euro.”

“For 50 years we were in the Soviet Union, we each dreamed about when the lats would return,” she said. “We refuse the euro without a referendum, without listening to the people.”

To contact the reporter on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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