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Toughest Test for New ECB Official Is Repairing Homeland’s Image

Toughest Test for New ECB Official Is Repairing Homeland’s Image

(Bloomberg) --

The biggest challenge for the newest member of the European Central Bank’s Governing Council isn’t interest rates or the size of asset purchases -- it’s restoring trust at home after bruising money-laundering and corruption scandals.

Martins Kazaks will take charge of Latvia’s central bank this month after a string of local lenders collapsed following allegations they handled dirty cash and even violated North Korea sanctions.

Toughest Test for New ECB Official Is Repairing Homeland’s Image

The central bank itself didn’t escape unscathed. After an almost three-decade career, Kazaks’ predecessor Ilmars Rimsevics is on trial for accepting bribes and a trip to Russia from a now-defunct lender. He denies the charges, which could land him in prison for 10 years.

“There’s been reputational damage,” Kazaks, 46, said Wednesday in an interview in Riga. “Of course, with the current governor departing we’ll regain some of the loss, but it’s not going to happen automatically.”

The country of 1.9 million people is trying to move past the downfall of its financial sector, which served as a gateway to the European Union for often questionable clients in the former Soviet Union. Right now, the main priority for Baltic euro member is staying off a gray list of jurisdictions deemed incapable of tackling money laundering.

The change at the top of the central bank is part of a wider shakeup that’s replaced the management of the financial regulator and the anti-money-laundering watchdog, and taken a much sterner stance on dubious cash.

When Kazaks, a former chief economist at Swedbank AB’s Latvian unit, becomes governor on Dec. 22, he’ll also assume his ECB role before the bank’s next interest-rate meeting the following month.

He declined to discuss his views on monetary policy before then, reiterating that the Frankfurt-based bank faces challenges from areas such as digital currencies and climate change. He said he supports an upcoming strategic review of issues like inflation prompted by the arrival of President Christine Lagarde.

The inflation target “has to be credible and we have to understand why we’re not hitting it,” he said. “Is it the transmission mechanism not effective? Is inflation the wrong measure to use at present? Or is it something else? Is there a structural reason for it being low?”

Kazaks will find an ally in his Governing Council colleague from neighboring Estonia. Madis Muller told Bloomberg on Wednesday the ECB should kick off its strategy review with a deep dive into the causes of low inflation before considering any changes to the current goal.

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

To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, Andrew Langley

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