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BAD BORROWING

  • 2010-10-06
  • Horace Whitbread, Riga

The collapse of Parex bank in 2008 was the straw that broke the Latvian camel’s back, forcing it to turn to the IMF and EU for support. The customer deposits that had to be covered, and specifically the loans from Western banks of more than 700 million euros coming due in 2009, were too much for the government finances to handle. These short-term loans were the ‘syndicated loans,’ the external borrowings (from Western banks that were too eager to lend to Latvia) that Mr. Zolotarev (TBT no. 722, Outlook) boasts of. One can, however, speak here of irresponsible borrowing, at the peak of the bubble, by Mr. Zolotarev’s ‘crack team’ (or were they smoking it?).

Banks make their profits by borrowing (from depositors, or through syndicated loans from other banks), and re-lending this money to others in local markets at a higher interest rate. They profit from the difference in interest rates: the spread between what they pay on their borrowings, and what they collect from their lending.

Illegations persist of Parex making questionable loans, loans on favorable terms to bank insiders (and highly unlikely to ever get paid back), and numerous allegations of laundering Russian money. Mr. Zolotarev, along with the rest of the bank’s board and top management, must certainly have been aware of the bank’s lending ‘practices.’ Therefore, his aggressive practice of driving up the bank’s syndicated loan borrowings in light of this was, at best, irresponsible, and has left the Latvian taxpayer stuck, possibly for decades, with paying off hundreds of millions of euros in losses.
The Latvian government should hold all these people accountable and liable for these losses.

 

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