(C/NF) IMF PUSHING FOR FULL NATIONALIZATION OF

C O N F I D E N T I A L RIGA 000723

SIPDIS
NOFORN

E.O. 12958: DECL: 11/25/2028
TAGS: EFIN PGOV ECON IMF LG
SUBJECT: (C/NF) IMF PUSHING FOR FULL NATIONALIZATION OF
PAREX

REF: A) RIGA 690 B) RIGA 701 C) RIGA 714

Classified By: Ambassador Charles W. Larson. Reason: 1.4 (b and d)


1. (C/NF) Summary: The IMF appears to be making the full
nationalization of Parex bank a condition for assistance to
Latvia. The Fund argues that the current situation is not
working and leaves the previous owners too much authority --
and leaves open the possibility of asset stripping. Implicit
in the fund's argument is that politics has played too big a
role in the current deal. An IMF requirement for full
nationalization of Parex might be enough political top-cover
for the government to take the decision. End summary.


2. (C/NF) Irena Krumane (strictly protect),head of Latvia's
regulatory agency the FCMC, provided the Ambassador a copy of
a November 22 paper from the IMF assessment team in Latvia
arguing for a full nationalization of Parex bank (refs a and
c provide background). Krumane repeatedly stressed the
sensitive nature of this information.


3. (C/NF) In the paper, the fund says the current plan of 51%
state ownership "is clearly not working" and adds that
leaving the current owners in control of the institution
creates a situation "ripe for asset stripping or worse." The
fund states that as of November 19 the government had nearly
LVL 750 million (roughly USD 1.36 billion) in exposure
through treasury deposits and Bank of Latvia loans to Parex.
That was before any thought of an injection of up to LVL 200
million in capital to the bank or the government guarantee of
around Euro 775 million in syndicated loans due in the first
half of 2009. The paper also notes that "some off balance
items may appear and could be significant" and that "the
current owners may have engaged in unbooked or strange
transactions during the current interregnum."


4. (C/NF) The fund further argues that full nationalization
allows the state to fully control the operation of the bank,
through the installation of "credible and competent new
management." It suggests that the announcement could be made
in conjunction with the announcement of an international
assistance package to stem deposit outflow. The fund is
hopeful that current owners would be amenable to selling to
the government, but if not, discusses ways that Latvia could
nationalize the bank through legislation (which would, as an
emergency measure, require a 2/3 vote in Saeima


5. (C/NF) Nationalization, according to the fund, would make
the bank more attractive to potential investors after
recapitalization and restructuring by the government. The
paper acknowledges the current global situation may make
finding a buyer harder and says that the EBRD "has
tentatively indicated that it might consider taking an equity
stake and assist the authorities in looking for a strategic
investor."


6. (C/NF) If nationalization cannot be completed quickly
(within two weeks),the IMF says the government should
consider a deposit freeze, but highlights the likely harmful
effect on other banks and the lasting damage to public
confidence in the banking sector overall. The fund rejects
any notion of revoking Parex's license as too costly and also
rejects a purchase and assumption agreement ("good bank/bad
bank transaction") as too slow and difficult to implement.


7. (C/NF) Comment: The IMF appears to share the concerns we
noted ref b about the possible politicization of the original
deal and barely masks its contempt for an arrangement that
leaves the two previous owners with any role in the bank's
management and administration. We don't yet know what the
government reaction to this proposal is, but we think they
could accept it as an IMF mandate, especially if they can
avoid devaluation as part of the assistance deal. But even
if the government does fully nationalize the bank, it will
then need to ensure the "credible and competent new
management" the fund insists is essential to the success of
any plan.
LARSON