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Tuesday, July 21, 2009

Danskebank's EMEA Daily Latvian Quote Of The Day

Quote of the day: "Representatives sitting in Washington and educated at Yale do not fully understand what is going on in Latvia", Latvian Economics Minister Kampars yesterday on the Latvian TV programme 900 sekundes.

As they point out, when the borrowers publicly criticise the lenders in this way, something must be going on.

While Mr. Kampars might be right on his assessment of the IMF staff, it is certainly unhelpful for further negotiations (if there are to be any) to bad mouth the institution that is supposed to give Latvia a loan. In our view it increasingly looks like the IMF will not pay out the next instalment on Latvia’s loan. This not only has ramifications for Latvia, but should also be a reminder to investors that the IMF is not just a “money machine” that automatically bails out all countries with funding needs.

Also Danskebank provide some simple calculations to illustrate the extent to which Latvia does still need the IMF funds:

A back of the envelope calculation illustrates this. In June, central government spent about EUR 125m more than came in revenues and funding. Assuming that this “burn rate” continues for the rest of the year (August-December) then that adds up to EUR 625m for the rest of the year. Furthermore, during the rest of the year EUR 715m worth of t-bills are maturing which need to be rolled over. Hence, the refinancing of maturing debt and the monthly cash burn adds up to EUR 1,340m. In our assessment the Latvian state treasury probably has EUR 540m in liquidity at the moment. That leaves the Latvian central government with a funding need of EUR 799m. This is why it is important that the EC in the Supplemental MoU ties up half of the EUR 1.2bn instalment for the financial sector, as the amount that will be “free” to cover the budget deficit will be less than the funding need (EUR 600m vs EUR 799m).

Thus, according to Danske the Latvian government will be around 200 million euros short by the end of the year – unless it is able to roll over more than half of the maturing debt, something which would require sustained perfect conditions for issuance in the local money markets for the rest of the year, unlikely given that the international markets are more or less closed to Latvian debt, and that non receipt of the IMF share would hardly increase the risk appetite.

Parex Update

The situation at Parex bank seems to be giving rise to all sorts of speculation at the moment. It has been suggested that the Banks owners have been systematically taking advantage of the bailout to line their own pockets. Some support for this view can be found in the statement of the Latvian Finance Ministry last Friday that it had asked the state prosecutor's office to probe Parex takeover last year.

RIGA, July 17 (Reuters) - Latvia's Finance Ministry said on Friday it had asked the state prosecutor's office to probe the state takeover last year of a major bank that helped trigger the need for the country's IMF-led bailout.

The IMF has delayed its latest share of lending in the bailout, though the EU has decided to give a further 1.2 billion euros. The prime minister said he would hold more talks next week with the International Monetary Fund (IMF). Some local media reports and politicians have criticised the wisdom of taking over the country's second largest bank, Parex, and the way it was done. Most recently the media has reported that some former employees left with big handouts. Finance Minister Einars Repse said he had asked the prosecutor's office to investigate the takeover to clear up such controversies

What the connection is (if any) between the "Parex affair" and all the other unknowns we have in our equation set at the moment still remains to be seen.

And finally, to close, here's yet another Latvia quote, this time from former IMF chief economist Ken Rogoff:

“It is so clear that Latvia’s peg is ultimately unsustainable, all protestations by Latvian government officials notwithstanding,” said Kenneth Rogoff, a former chief economist at the I.M.F.. “But ultimately unsustainable pegs can go on for years before crashing and burning, and Brussels seems to be willing to pay a lot to get past the financial crisis before cutting the cord on Latvia.”


Nutt ja Hala said...

of course You have forgotten to mention recent piece of news about Parex, because this doesn't fit your dogma.

"According to Parex banka's unaudited financial results as at 30 June 2009, the loan portfolio of the Bank was 1.63 billion lats, deposits - 1.64 billion lats"

So loans are fully covered with deposits. That is very rare these days.

Edward Hugh said...

Hello Nutt, fortunately I don't have any dogma, but one point you forget to mention, deposits were down considerably between Q1 and Q2.

According to Izabella Kaminska in FT Alphaville today:

"The bank appears to hold 1.64bn lats in customer deposits, compared to 2.03bn lats in the previous quarter - that’s a very significant drop."

In fact Izabella seems to have been going through the bank reports, and has uncovered some very strange anomalies.



The bank appears to hold 1.64bn lats in customer deposits, compared to 2.03bn lats in the previous quarter - that’s a very significant drop.

Meanwhile, the bank, which in March was 85.15 per cent owned by the Latvian Privatization Agency (LPA) and 14.86 per cent by other shareholders, has further changed its ownership structure.

And here’s the peculiar thing. On April 3rd a press release - still accessible via the Reuters system - said LPA shareholders had decided during their EGM to raise 227m lats (€323m) of capital from a state investment via a 165m lat share issue — valued at 1 lat per share — and a 62m subordinated debt issue. The release states that this was to ensure a capital adequacy ratio of 12 per cent.

There is no sign of this release on Parex’s web site website however.

On May 11th, the European Commission eventually agreed a capital restructuring. A Parex release confirms the terms agreed were the same as those stated above, with one difference: the restructuring would now be achieving a capital adequacy of 11 per cent. As the terms remained the same, one must assume the drop in capital adequacy was the consequence of a deteriorating picture at the bank.

Fast forward to Parex’s AGM on May 29th however, and shareholders actually end up agreeing a completely different capital raising altogether:

On 24 March 2009, the Government of Latvia made a decision to increase the share capital and to provide subordinated loan to the Bank totaling LVL 227 mln. On 11 May 2009, the European Commission approved share capital increase of LVL 141 mln and additional subordinated loan amounting to LVL 50 mln. On 22 May 2009, the Privatisation Agency made the respective investment into the Bank’s capital, as well as issued the subordinated loan in the amount set by the European Commission. On 16 April 2009, a share purchase agreement was concluded between the Privatisation Agency and the European Bank for Reconstruction and Development (EBRD). According to the terms of the Agreement the EBRD will purchase 57.5 million voting shares of the bank obtaining 25% plus one share of the Bank’s capital.

No date is given to the update, but it clearly must have come as recently as May 22nd from the dates give. The practice of back-updating your quarterly reports, meanwhile, seems a curious phenomenon in its own right.

All we can tell is that everything is not what it seems in Latvia.

Nutt ja Hala said...

Is rhis the same Isabella, that during last latt panic stated that Latvian Central Bank "increased" RIGIBOR?

Nutt ja Hala said...

btw, Parex has lowered interest they pay for deposits. shows something.

Edward Hugh said...

"To be exact, this half was not to handle (only) Parex related issues but "shall be reserved for banking sector support". There are some more smaller banks, who could use part of this."

Well this is certainly true, but are you trying simply to correct some details (while Rome burns) or are you seriously suggesting that this is not mainly about Parex, and that the main issue is that the mounting costs involved as the loan quality deteriorates are not giving serious budgetary difficulties for the Latvian government. Sometimes a straight answer might be helpful.

And while I am here, I have had occassion to comment in the past on some of the apparently infantile characteristics about the way *some* people discuss things in Estonia. Especially botched attempts at character assasination instead of dealing with arguments head on. This is much more reminiscent of old Soviet practices, and a long way from normal conditions in Western Europe. Which just shows us I suppose how far Estonia's reform process needs to go in order to arrive at the standards necessary for euro membership.

Anonymous said...

Surely you cannot be arguing that the extreme labor shortages and resulting inflation fueled by cheap credit from Sweden and Russia have not given Latvia a competitiveness problem. Estonia certainly has one, and it is cheaper than Latvia. As someone living in Estonia but doing business in Latvia, nothing has every added up. The country was/is opaque / not transparent. In 2007, I remember people joking that know one understood how he Latvian economy posted the numbers it did - they always seemed to defy the reality on the ground just as the politics seemed to be controlled by grey figures behind the scenes pulling the strings.

Does anyone really know the true situation? Are the government cuts reforming public administration or just gutting public services while leaving the same inefficient system?

Edward Hugh said...

Hello Anonymous,

"Surely you cannot be arguing that the extreme labor shortages and resulting inflation fueled by cheap credit from Sweden and Russia have not given Latvia a competitiveness problem."

Not at all. I agree completely. There must be some misunderstanding here. See my "Is the Latvian Economy Running Out Of People" post at the top of the right sidebar.

Edward Hugh said...

Incidentally, the EBRB's Thomas Mirrow doesn't seem to be too happy about the way things are going in Latvia at the moment.

"The European Bank for Reconstruction and Development is watching the situation in Latvia with concern and will support IMF and European Union efforts there, the head of the institution said on Friday.

'There can be no secret that Latvia is a cause of concern,' Thomas Mirow, the head of the EBRD and former deputy German finance minister said, adding it would back IMF and EU efforts to help the situation."

The Fund is seeking to enforce conditions that include more budget cuts and tax policy changes.

But resistance from Latvia's government on the issues has prompted a fresh round of fears over the country's finances and ability to avoid a devaluation of the lat currency.

Hynek Filip said...

Reading many of these panicky comments, I sometimes find it hard to believe that we here still exist, live well and buy dollars that get cheaper by the day.

It seems to me that in the minds of many, the Baltics (or, in the mind of Izabella, the whole of eastern Europe), have been marked as hell on Earth, no-go-zone, land of scary monsters or whatever else.

Points is, most of these people have never been in the countries they earmark as living Hell. They live in the virtual reality of the Internet, statistical indicators and IMF proclamations.

I have been to at least a dozen EU countries in the past year alone. Some of them I visited at least three or four times.

And, voila, you see real wealth and really high living standards in many of those countries allegedly stagnating and hit by the current crisis. Northern Italy, for example, most of Austria, Germany, Bratislava, Prague.

On the other hand, you see little real wealth in "fashionable" countries like Ireland, and, especially, Finland.

In my book, the bombed-out-flat, Honeckerised, aging and unfashionable Dresden is a far wealthier city than, say, Helsinki. However, one will not find this out on the Internet - one must see both the Frauenkirche and the Helsinki cathedral (or try to buy a beer in downtown Helsinki and then on the Bruehl Terrace).

Alas, we are waging a war we can not win. We are out of fashion these days.