LATVIAN GOVERNMENT TAKES MAJORITY SHARE IN PAREX

C O N F I D E N T I A L SECTION 01 OF 02 RIGA 000690

SIPDIS

TREASURY FOR WILLIAM LINDQUIST

E.O. 12958: DECL: 11/10/2018
TAGS: EFIN ECON PGOV LG
SUBJECT: LATVIAN GOVERNMENT TAKES MAJORITY SHARE IN PAREX
BANK

Classified By: Ambassador Charles Larson, for Reasons 1.4 (b) and (d)


1. (U) Summary. On November 8, at an emergency Cabinet
session, the Latvian government decided to buy a 51% stake in
Parex Bank, Latvia's second-largest (and largest independent)
bank, in order to keep the keep the firm out of bankruptcy.
The GOL is to pay a nominal fee to the previous owners for
the majority shares, and then pass those shares to the
state-controlled Latvian Mortgage and Land Bank (Latvijas
Hipoteku un Zemes Banka). The Mortgage and Land Bank will
reportedly inject around 200 million Lats (USD $364 million)
into Parex Bank to shore up Parex's finances, with these
funds coming from the Latvian central bank. Parex faced a
growing liquidity problem and in recent weeks had been
looking for sources of cash. The bank was reaching the point
where it would be declared insolvent by law, which would have
been far costlie for the government. The government's
intervention was necessitated by an unexpected run on bank
deposits which further reduced liquidity, with Parex
depositors reported pulling USD $108 million out in the days
before the announcement. Reaction has been generally
favorable from the Latvian financial community, and political
reaction has been cautiously optimistic, though opposition
parties are asking that the government provide more
information to the Saeima (Parliament). End summary.

--------------
Averting Bankruptcy
--------------


2. (U) On the evening of November 8, the Latvian government
announced that it would be taking a majority stake in Parex
Bank, the country's largest independent bank, and
second-largest overall. At a press conference following an
emergency meeting of the Cabinet, PM Godmanis explained that
the GOL would take the action in order to safeguard the
Latvian financial system. Finance Minister Slakteris, also
speaking at the press event, noted that the government faced
the choice of either helping Parex or letting it pass into
bankruptcy, which would cost the government "billions" (one
estimate put the figure at USD $1.09 billion) in deposit
insurance compensation. Such payouts would quickly deplete
the government's deposit insurance fund, which stands at
roughly 80 million Lats (USD $145 million). Amounts above
that would come out of the already tight state budget. The
Chair of Latvia's bank regulator, the Latvian Financial and
Capital Markets Commission (FCMC),Irene Krumane, told us
that the final cost of letting Parex go under could have
reached USD $1.5 billion, when the assets of state pensions
and state-run enterprises held in Parex were taken into
consideration.


3. (C) The government's hand was forced by a surge of
depositors taking their money out of Parex, as rumors spread
about the bank's weakening financial situation. According to
Krumane, the FCMC had Parex under watch since mid-August, for
various reasons which included the bank's exposure to risky
securities, falling capital adequacy ratios and concern about
potential fallout of the Russian invasion of Georgia, given
Parex's high volume of non-resident deposits from Russia. In
contrast to other banks which were managing declining assets
over time, Parex was holding on to increasingly toxic assets
from the U.S., U.K., Russia, and elsewhere. In the first
week of November, the FCMC and government noticed a surge in
deposits (both resident and non-resident) being withdrawn,
which was putting Parex in danger of insolvency. The
government determined that Parex was systemically important
to the Latvian financial system, and in response to Parex's
request for assistance, the government agreed to take
controlling interest.

--------------
The Deal
--------------


4. (C) In the deal announced, Latvia will pay a nominal fee
of 2 Lats (USD $3.64) to the two principal owners of Parex,
Valery Kargin and Viktor Krasovicki, in exchange for 51% of
Parex's shares. These shares will be passed to the Latvian
Mortgage and Land Bank (Latvijas Hipoteku un Zemes Banka),
which is the only state-controlled bank. The Mortgage and
Land Bank will then inject approximately 200 million Lats
(USD $364 million) into Parex to shore up the bank's
finances. This money will come from the Bank of Latvia
through the sale of bonds on the local market. In addition
to transferring 51% of Parex shares to the government, Kargin
and Krasovicki must pledge their remaining shares (they
previously held a total of 84% of the bank's shares - 42%
each) as security against the 200 million Lats from the

RIGA 00000690 002 OF 002


Mortgage and Land Bank, and according the FCMC, the two are
also required to put their personal properties up as
additional security. In effect, they are pledging their
assets that the bank's situation is as they said, something
Krumane doubted following recent audits. Kargin, who was
Parex's Chairman of the Board, will be required to step down
from that position, but both Kargin and Krasovicki will be
retained as Board Members.


5. (C) Both Godmanis and Bank of Latvia Governor Ilmars
Rimsevics have stated that there are no similar actions
planned for other banks in Latvia, and this is supported by
information provided to us by FCMC Chairperson Krumane.
Rimsevics told the press that the GOL would not hold on to
its controlling stake in Parex for long, with the Bank's
press spokesman saying that the government would look to sell
to strategic investors within a year or two. Krumane
mentioned that the time frame would be at least six months.

--------------
Financial and Political Reaction
--------------


6. (U) Reaction to the deal has been generally positive.
From the financial community, most experts have applauded the
move as means of restoring faith in Parex bank and the
overall Latvian financial system, and many have noted that
with the nominal sum paid by the government, the financial
pain falls on Parex's owners. Political reaction has been
cautiously optimistic. Einars Repse, former Governor of the
Bank of Latvia and Prime Minister who is currently an MP from
the opposition New Era (Jaunais Laiks) Party, has urged the
public to trust the government and the Bank of Latvia, though
his party has asked that the government provide more
information to the Saeima (Parliament). Similarly, the
opposition party Civic Union has called on the government to
explain to the Saeima how the government will ensure that
state funds are used responsibly and to discuss how the deal
will impact the state budget. However, there is no need for
parliamentary approval of the deal. The European Commission
offered its preliminary approval on November 10.

--------------
IMF Assistance
--------------


7. (C) We found opinion split on whether the takeover of
Parex increases the likelihood that Latvia may need to
approach the IMF for assistance. The Bank of Latvia told us
that this does not change Latvia's position and that neither
the Bank of Latvia nor the Economics Ministry have
contemplated IMF assistance. However, Krumane at the FCMC, a
former Treasurer of Latvia and State Secretary of the Finance
Ministry, said she believes that the new circumstances
definitely make it more likely that Latvia would need to seek
help from the IMF.

--------------
Comment
--------------


8. (C) The government reaction has drawn generally positive
reviews so far for being swift and decisive, and for ensuring
that the owners did not get away scott-free (as happened in
the Banka Baltija case of the mid-90's). In the coming days,
we will need to keep an eye on how the decision is
implemented. As one prominent newspaper editor told us
today, the temptation to play politics with Parex - which has
always been a political player in Latvia - will be high. The
question is whether leaders can rise above that and hold firm
to implementing this in a professional way.
LARSON