Latvia faces 'different banking risks' from Cyprus

The international ratings agency Fitch said Wednesday that Latvia faces "different banking risks" than bailed out Cyprus, and emphasised that the Baltic country should be able to adopt Europe's single currency next year.

The banking sectors of both countries are heavily reliant on non-resident deposits, but Latvia depends less on the financial services sector, Fitch said in a report that compared banking in Cyprus and Latvia.

"Non-resident deposits -- predominantly from Russian beneficiaries -- account for 49 percent of total deposits (higher than Cyprus' 37 percent) and are concentrated among domestic banks," Fitch said in a statement.

"In context though, non-resident deposits are only 40 percent of GDP (gross domestic product) in Latvia compared with about 140 percent of GDP in Cyprus."

Fitch reiterated that it expects Latvia to be invited to join the single currency bloc in January 2014 and said it believes Riga would undertake banking reforms to that end.

"These reforms may range from measures to tame banks' appetite for non-resident business to others reducing Latvia's attractiveness as a banking hub," Fitch said.

Latvia's financial services sector has come under scrutiny after a debt and banking crisis in Cyprus prompted fear that Latvia could become "Cyprus number two".

The Baltic state's banks already attract a large number of depositors from Russia because there is a significant Russian-speaking community remaining from Latvia's days as a Soviet republic.

According to figures from Latvian financial regulator FKTK, non-resident deposits increased by 2.6 percent or 162 million lats (231 million euros, $304 million) in March.

But Riga has played down fears that Latvia would become a new offshore haven for Russian cash, saying there was a "very, very minor inflow of Cyprus money" to the Baltic state.

An ex-Soviet republic of 2.0 million, Latvia joined the European Union in 2004 in tandem with Cyprus, a Mediterranean island-nation of 1.1 million.

The Baltic state is still recovering from the world's deepest recession in 2008-9, which saw a cumulative economic contraction of 25 percent and required a three-year IMF-EU bailout worth 7.5 billion euros (10 billion dollars).