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Sunday, November 9, 2008

Latvian Government Nationalises Parex Bank

Latvia's government announced today that it has decided to take over the nation's second most important financial institution after the bank ran into liquidity difficulties. The Latvian government apparently decided late yesterday (Saturday) to take a 51 percent stake in Parex Bank, Latvia's second largest bank by total assets, following the preparation of data that indicated the bank was headed toward insolvency.

Prime Minister Ivars Godmanis stated that Parex was functional but in need of liquidity. He also said the government had faced a choice of either taking control of the bank or allowing it to enter bankruptcy. The government also suggested that there were no plans to rescue any of Latvia's other 25 banks at the moment, but that the possibility could not be excluded in the future.

The government bought the majority stake in Parex for 2 lats ($3.70). Another 34 percent stake in the bank will be held as collateral by the state-owned Hipoteku Bank. Obviously the fact that they have had to nationalize Parex bank was yet was another blow to Latvia's deteriorating economy, and to the governments present strategy for addressing the crisis. On Friday we learnt that gross domestic had fallen by an annual 4.2 percent in the third quarter.

Parex Bank was almost unique in both the Latvia and Baltic context in that it was homegrown. Founders Valery Kargin and Viktor Krasovitsky established the bank in 1992, one year after Latvia split from the Soviet Union and achieved independence.

A majority of the banking industry in the Baltic states of Estonia, Latvia and Lithuania are owned by Scandinavian financial institutions, and hence, up to now, have been somewhat shielded from the downturn.

This is obviously the first, and not the last, piece of news of this kind we are going to get during the present economic slump, and the nationalisation decision is sure to heat up the debate about whether or not to seek IMF protection, and indeed whether (or when) to break the Lat-Euro peg.


Anonymous said...


I hope that lat can resist the pressure. I heard that the Latvian Central bank has been intervening for some time (longer than last time when there was pressure on lat).

How do you see the other Baltic currencies in this situation? I so hope that the currencies could survive intact to enter euro. How do you see this? Is it only wishfull thinking?

Anonymous said...

Let´s see what will be the next bank.
For Latvians I do hope that LVL will resist, but to be honest I must say LVL is much too overvalued currency.

Edward Hugh said...

Hello both of you.

I appreciate the reasons why you are concerned, but I have to agree with the second comment. After all that inflation Latvian prices are now way too high to be able to get strong GDP growth out of exports, and domestic demand is just about dead as a driver as far ahead as the eye can see, so at some point de-pegging becomes inevitable, if you don't want complete meltdown.

Your economy can be like the proverbial bathwater circling down the wastepipe as the young people leave in search of work elsewhere as the other European economies start to pick up starting in 2010 I'm afraid. Whichever way you look at it the year ahead is going to be hard, on my view better to use it doing something constructive rather than simply sitting there waiting to have your head chopped off.

By the time we get round to 2012 the whole CEE landscape is going to look very, very different.

"How do you see this? Is it only wishfull thinking?"

I'm afraid I think it is. If the Euro is still there in its present form (we need to worry about sovereign debt and external imbalances in Southern Europe too) by the time Latvia is ready to join, then better to get the parity right so you can export to the other eurozone countries.