MESSAGE TO INVESTORS

Mar 01, 2001

The merger of the two runners-up in Swedish banking's top three - Swedbank and SEB - which would see the Swedish banks overtake Nordea to become the largest financial group in the Nordic region, is causing a ripple effect throughout Estonia, Lithuania and Latvia.

In Estonia the Swedes will have to decide which of their subsidiaries to sell - SEB's Uhispank or Swedbank's Hansapank, in accordance with local anti-competition rules. The Lithuanian government meanwhile has turned its back on its Swedish-owned Estonian partners. Hansapank is no longer seen as a worthy partner to buy its problem ridden Soviet-era savings bank, Taupomasis Bankas. This appears to be the final step in a campaign to freeze out Hansapank.

First, Lithuanian government negotiators announced in January that Hansapank's suggestions would no longer be considered. The direction of the so-called "negotiations" would be reversed; the government would set the rules and dictate the tone.

A month later, the government expressed its discontent with Hansapank, accusing it of premature meddling in the savings banks' affairs. In no uncertain tones government negotiators noted that although Hansapank was the only bidder for Taupomasis Bankas, "Lithuanian negotiators do not intend to make any concessions detrimental to our country."

The government has now decided that Taupomasis Bankas' non-liquid assets and bad loans, which together amount to a debt of some $27 million will remain with the bank and become the government's problem - an abrupt about turn since reports, albeit unofficial, that the bank was to be sold for some $37 million with the government taking on no additional liabilities related to its bad assets and loans. With the government taking on the new liabilities, some may hope Taupomasis' value will rise, but such hopes seem frail.

The Lithuanian governments' decision to pull out of negotiations with Hansapank immediately following the announcement of Swedbank and SEB's merger seems a touch premature. It will be at least four months before the merger is approved by the EU Competition Board in Brussels and the outcome is not 100 percent certain.

If the Swedish merger takes place, the Swedes can easily live without Taupomasis. They may be quite content to swallow the bank with the largest assets and the most advanced technology - SEB-owned Vilniaus Bankas, to make up for Swedbank's weaker position in Lithuania.

But the Lithuanian government should think what message it is sending to the next bidder for its lucrative retail bank, which holds 47 percent of individual deposits in Lithuania. Meanwhile, the unrestructured Taupomasis continues to stagnate. The government should not hope the sale of Taupomasis will produce wads of cash with which to patch holes in its budget.

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