Frequently asked questions and answers of the euro introduction in Latvia

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1 Frequently asked questions and answers of the euro introduction in Latvia When euro will be introduced in Latvia? In compliance with decision of the Cabinet of Ministers on March 16, 2010, euro changeover target date in Latvia is January 1, State institutions in Latvia use this time to do all ground-work to ensure the euro changeover; enterprises are also advised to act in similar manner. The lats exchange to the euro is planned so that daily life of Latvian citizens will be disturbed as slightly as possible. How to exchange money easier and more convenient? Most convenient way - non-cash exchange. It is advisable to put all cash money reserves on your bank accounts before the euro changeover day. The lats reserves or remaining money on bank accounts will be automatically converted to the euro on the day. Does the lats exchange to the euro imply the price increase? To prevent unjustified rise in prices traders and service providers will be obligated to display prices both in the lats and euro three months before and six months after the euro changeover. It will allow easier keeping up with prices. Service providers and traders could be called to account for incorrect price display. How long time following the euro changeover it will be possible to use the lats? To ensure convenient cash circulation following the euro changeover is it planned to introduce a two-weeks dual circulation period of both currencies - lats and euro. During this period it will be possible to pay for goods and services both in the lats and euro. A two-weeks period after the euro changeover day euro-cash will become the only legal tender. Will it be possible to exchange cash lats to the euro when it will not be possible to settle payments in the lats anymore? Yes, half a year following the euro changeover it will be possible to exchange the lats to the euro in all commercial banks, but for unlimited period of time it will be done by the Bank of Latvia.

2 How to compare value of the lats and euro? Nominal value of the lats is higher that the nominal value of the euro, so both income - salaries, pensions and others - and prices will be bigger in number. To ensure that citizens can follow prices and get used to the new currency companies will quote the prices in both lats and euro three months before the actual introduction of the euro. What currency will the salary be paid in following the euro changeover day? How will they be calculated, rounded? Salaries, as well as social benefits and pensions will be paid in euro following the euro changeover date they will be calculated according to strictly fixed exchange rate and rounded (two digits following the decimal point) in compliance with strictly mathematical principles (less than 5 - rounded down, more than five (including) - rounded up). What will happen with loan and deposit contracts expressed in the lats? The principle of contract continuity will apply to all existing contracts which means that there will be no need to change or replace contracts. Sums will be automatically re-calculated in euro applying transitional exchange rate. The same applies to other contracts signed with individuals or legal entities. Will it be possible to use Latvian euro coins abroad? Yes, euro coins issued in the euro area Member States can be used as a legal tender in all the euro area. It means that Latvian euro coins can be used in Portugal, Germany, Italy and other euro area countries, and vice versa - coins of other countries could be used in Latvia. What are the gains from the euro changeover? Exchange to the euro will allow consumers easier compare prices on goods and services in various countries, which, in turn, promotes competition among traders and service providers. Single currency - euro - is advantageous for tourists. When travelling through the euro area countries, tourists do not have to exchange the currency of one country for that of another country It makes travelling more convenient and cheaper, because one does not have to exchange currencies and pay the associated commissions. A two-weeks dual circulation period of the lats and the euro has been envisaged from the day of introducing the euro. What should seamen do who often spend even 6 months in their voyages, or representatives of other professions who permanently stay abroad? The two-weeks dual circulation period of the lats and the euro is only one way how people can use cash lats in the exchange process. First of all it should be noted that non-cash lats in bank accounts will be automatically exchanged to the euro on the day. Therefore, it is the most convenient way of currency exchange. Secondly, Latvia's National Euro Changeover Plan states that six months following the day it

3 will be possible to exchange cash lats to the euro in the banks, three months - in the SJSC Latvijas Pasts. For an unlimited period of time and amount after the -day it will be possible to exchange the lats banknotes and coins in the Bank of Latvia. What should people do with one and two lats collector coins, for example, with stork, mushroom and other images? Will it be possible to use these coins as a legal tender? During the euro changeover process it will be possible to exchange these coins to the euro in the Bank of Latvia, banks, the SJSC Latvijas Pasts. Of course, people willing to do so will keep special circulation coins and collector coins in their collections. How will functions of the Bank of Latvia change after the euro changeover? When Latvia joins the euro area the Bank of Latvia will have to perform the tasks of the European System of Central Banks (participate in defining and implementation of the EU monetary policy; conducting foreign exchange operations, holding and managment of foreign reserves of the EU Member States, ensuring smooth functioning of the payment system, organising statistical data collection, preparation and publication of statistics). The Governor of the Bank of Latvia, in the capacity of the member of the Governing Council of the European Central Bank, will have to participate in decision-making processes presenting arguments on euro interest rates, monetary instruments in the euro area etc. Will the euro payment system be used for all interbank settlements? Yes, it will be possible to use the euro payment system TARGET-2 for all interbank settlements. Already in November 2007, Latvia launched one of 21 components of Automated Real-time Gross Settlement Express Transfer System TARGET-2. The Bank of Latvia ensures operation of TARGET-2 Latvia together with other authorised banks in the European Central Bank system. It shall be noted that banks themselves can choose the mean for settlements. In Europe, there are also other payment systems that banks can use for their settlements. What will happen with loan and deposit contracts expressed in the euro? Nothing will change regarding loan and deposit contracts, they will remain effective according to agreed provisions. In case a client has several bank accounts, including one in Lats which will be converted into Euro as soon as the Euro changeover will take place, then after some time the bank can offer the client to merge existing two Euro bank accounts to arrange the banking system; however it is up to the bank and the client to deal with this issue individually. What interest rate will apply to credit and deposit contracts after the euro changeover? After the euro changeover, contract continuity principle will apply to all contracts in national currency signed before the euro changeover date envisaging that the contract will stay in force on previous conditions and the currency will be exchanged according to fixed exchange rate (values expressed in percentage will not change). At

4 the same time, the client and the bank can agree on revision of contractual provisions if interest rates in national currency and euro differ considerably. Similarly, on the basis of experience of other euro area countries, considerable interest rate convergence is going on before the euro changeover and in the result contractual provisions in national currency and euro actually do not differ. The only exceptions are contracts signed on the basis of fixed rates. In the result of the lats changeover to the euro is it planned to get rid of the smallest monetary units (such as one and two-cent coins)? Euro cash is planned to include 1, 2, 5, 10, 20 and 50 cent coins, and 1 and 2 coins and banknotes. Such a range of coin denominations corresponds to the range of cash lats coin denominations and are usually used by Latvian citizens for daily settlements. By the introduction of the euro as the sole mean of payment it is planned to use the whole range of these coins as in other euro area countries, except Finland, which does not use 1 and 2 euro cent coins in daily cash settlements, although it emits these coins with its own reverse. How the euro changeover will influence money market interest rates and share prices? Introduction of the euro will stabilise and reduce money market interest rates in Latvia. Interest rates of such minor currencies as the lats are higher than the euro rates, since lenders include the risk of such small countries in interest rates. During economic and political instability periods the lats rates have significantly exceeded the euro rates. As the date when Latvia will join the euro area will come closer, which will be seen as the stabilization of the Latvian economy, there will be convergence of interest rates - the rates in Latvia will approach the euro rates. After the introduction of the euro, since there will not be the lats anymore, there will also not be a money market index RIGIBOR and instead will be EURIBOR indices, which are currently for a long term lower than RIGIBOR indices. It is expected that the euro introduction will affect positively prices of shares of Latvian companies. This has already been observed in other new EU Member States when they adopted the euro. The interest of euro area investors in the shares increases if they can invest in their own currency - the euro. Introduction of the euro thus will contribute to the demand for shares of Latvian enterprises, facilitate their turnover and price increase. Are payment systems of the Bank of Latvia ready for the euro changeover? Yes, the Bank of Latvia ensures the operation of Trans-European Automated Realtime Gross Settlement Express Transfer System TARGET-2 since 2007 together with other authorised banks of the European System of Central Banks. TARGET-2 processes settlement of the Eurosystem's monetary policy operations, interbank transactions, large value and urgent customer transactions and final settlement of other payment systems of the European Union. The Bank of Latvia maintains the operation of TARGET-2 Latvia, component of TARGET2, where participants are Latvian banks, the Bank of Latvia and State Treasury. The Bank of Latvia maintains the Bank of Latvia's Electronic Clearing system (EKS) for customer payments, which ensures fast and effective settlement in lats and as of 2008, in euro as well. As of November 2010, EKS is SEPA (Single Euro Payment Area) requirements' compliant

5 infrastructure and banks can send and receive customer payments in euro via EKS across all EU Member States, Iceland, Liechtenstein, Norway, Switzerland and Monako. EKS ensures that the settlement of euro payments is executed within one business day across the EU.