Audit shows government botched Parex rescue

  • 2009-10-01
  • By Darja Kuznecova

RIGA - Results of the State Audit Office's report on the Parex bank takeover deal by the Latvian state will be released to the public on Oct. 1, reports news agency LETA. Leaked reports show that the Office will conclude that Parex bank owners Valerijs Kargins and Viktors Krasovickis were able to settle the bank's outstanding liabilities to depositors and solve problems with repaying syndicated loans, all at the expense of the Latvian people.

The report shows that Kargins, Krasovickis and their relatives hold a total of nine deposit accounts still in the bank, which earn 380,000 lats (542,850 euros) a month in interest. They also were allowed to keep their villas and cars in the deal. The Audit Office also established that 60 percent of depositors at the bank were not citizens of Latvia.

During the midst of the bank collapse, it was reported, a private meeting of the Cabinet of Ministers was held on Nov. 4, 2008, with an agreement offered to bank co-owners Kargins and Krasovickis. Ten conditions were put forward in the Ministry of Finance contract. When the final contract was ready to be signed, on Nov. 8, conditions adverse to Kargins and Krasovickis had been removed. Specifically, this meant that the two owners weren't required to maintain all their money deposits in fixed capital, or shares, thus protecting their equity from being wiped out in the collapse. The agreement also did not cancel the owners' favorable interest rate treatment on deposits, held by shareholders and their families.

The decision to invest state money in Parex was made on Nov. 8 last year, but regulatory control of Parex transactions started only on Dec. 1, by which time more than one billion lats disappeared, say Audit Office estimates.
Russian media has reported that the trigger for the collapse centered on rumors about the instability of the bank and possibly news that other account holders were pulling their money out. Russian officials say that Parex served Russian middle class officials, businessmen with operations in the Baltics, and the elite of society 's politicians and relatives.

Several laws may have been breached in the takeover deal. For instance, the State Treasury carried out the finance minister's orders and conducted operations that may have been illegal. The loan agreement with the IMF at year-end 2008 was also counter to the law on the state budget. The law on the 2008 state budget stipulated that Latvia's external debt must not exceed 1.68 billion lats, but with the loan agreement this amount was exceeded by 960 million lats.

The Audit Office has concluded that, in rescuing Parex, 674 million lats was withdrawn from the Latvian economy by the state and deposited at the bank for a few weeks at the end of 2008, money which the state will probably never recover. This amount was to be returned in July or August this year, but only 50 million lats and 9 million euros was repaid.

In order to invest in Parex, the state had to borrow from international lenders, increasing government debt from 6 percent to 38 percent. Because of the borrowing by the state, loan interest rates at Latvian commercial banks increased to up to 15.24 percent. Floating rate loan recipients have suffered as a result.

The Audit Office estimates that the technical costs of the takeover reached 1,012,646 lats by June 30 this year. Parex' current management and their consultants cost at least 100,000 lats a month.
The Audit Office also strongly criticizes the Financial and Capital Market Commission, headed by Irena Krumane. The commission did not provide systematic analysis of Parex' liquidity problems and did not try to stop the situation from deteriorating.