RIGA - The Latvian government has agreed to buy out one of the country's largest banks after clients panicked and pulled out millions of euros in the space of a few hours.
Parex Bank, Latvia's largest homegrown bank, faced a massive capital loss on Nov. 8 due to unsubstantiated rumors regarding the banks imminent collapse.
"People believed the rumors regarding the collapse and began withdrawing money, causing capital to take a serious plunge," Finance and Capital Market Commission Deputy Chairman Janis Brazovskis said.
Although Brazovskis could not name a concrete sum, he estimates the loss in capital to be around 60 million lats (85.4 million euros).
Brazovskis also told reporters that the persons panic stricken the most were clients with less than 50,000 lats in their accounts.
"They made a run on the bank and told their neighbors to do so as well," Brazovskis said. He expressed surprise at the action as the government insures all deposits up to 50,000 lats and no one would have lost money.
"Those with accounts holding over 50,000 lats should be upset, but they seem to be acting much more calmly," he said.
The European Commission approved the Latvian government's decision to help the struggling Parex Bank by giving them permission to buy out the 51 percent majority of the company at the symbolic price of 2 lats 's one for each of the two owners, Valerijs Kargins and Viktors Krasovickis. The owners will have the option to buy back the bank at the same price, plus all losses not specified in the bank's reports.
In a special nine-hour cabinet session on Nov. 8, members of government decided "that the state will become a majority stakeholder in Parex Banka to secure the stability of Latvia's financial system and not disturb the work of Parex Banka," stated Prime Minister Ivars Godmanis.
The prime minister said the decision to take over Parex was not unlike the actions of other EU nations to support their banks.
"It is necessary to do everything to avert disruptions of the bank and the financial system," Godmanis said.
"The government will take over the controlling stake in Parex Bank through Latvia's Hipoteku un Zemes Banka (Mortgage and Land Bank) in about two weeks," said Finance Ministry State Secretary Martins Bicevskis, who was also appointed council chairman of Parex Bank by the cabinet.
A NEW HEAD
Prime Minister Ivars Godmanis also told reporters that Inesis Feiferis had been appointed as the new board chairman for the ailing Parex Bank and Bicevskis has been appointed as the new council chairman.
"I believe we will manage to assure depositors and all institutions about the safety of their resources in Parex Bank," said the prime minister.
Finance Minister Atis Slakters however said that the ministry will not be looking for a new state secretary in order to cut costs and save taxpayer money.
"The current situation is unique; we have not seen anything like that in the past 10 years. According to Latvian legislation, a state official cannot be appointed as a president or council chairman of a bank. I believe that the situation is wrong. Legislative amendments are being prepared now," said Slakteris.
Slakteris also added that the legislative amendments will be immediately adopted along with the 2009 government budget.
Slakteris said that initially he wanted to appoint Bicevskis as the president of Parex Bank, but it is a full-time job and he wants to keep Bicevskis on as the state secretary.
"We have to continue reduction of the budget and many other things," said Slakteris.
THE WIDER PICTURE
Parex Bank may have been able to continue operating for several months without state support, but decided that handing the controlling shares over to the government was in the best interests of the customers, said Krasovickis. "In fact, it started when Sweden announced its support to Swedish banks. It distorted competition in the Latvian deposit market. Customers started to get worried," said Krasovickis.
"The past weeks have been very tough and the liquidity indicator was declining (about 8.5 percent on Nov. 7). We decided not to wait until it gets worse. We might have been working for another month, two or even three months," said Krasovickis.
Krasovickis also noted that the bank will have to repay the syndicated loans anyway, but the situation on the market is not improving and there are no signs of improvement in the future.
"We decided that we have to take care of our customers," said Krasovickis.
He said that the bank has to repay the first syndicated loan in February. "If we receive the state guarantees now as promised by the government, there will not be any problems," said Krasovickis, adding that it is likely to be a matter of refinancing.
Of the remaining 49 percent of shares, about 34 percent of Parex's shares will be promised as security in favor of Latvijas Hipoteku un Zemes Banka, giving the bank voting rights. Approximately 15 percent of the interested will continue to be held by Parex Bank minority share holders.