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Why Parex? 10

I didn't think it would be Parex. Of course, these are hard times for the banks, but… perhaps I was under the lingering impression of how deftly Parex had eluded the Russian crisis of 1998. Somehow I must have expected that Parex would emerge unscathed after this crisis. Oh well...

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In any case, I think the whole Parex affair raises four major practical questions for those of us who go on. First, there is some learning value in understanding why exactly Parex ended up like this. Second, there is a question whether nationalization was the right thing to do. A related (third) question is what it all means for us, the taxpayers. And fourth, who's next?

Why Parex? There is much that is not clear about what has happened. Some government officials have blamed it all on the depositors, who rushed to withdraw their money from the troubled bank. The run on Parex certainly served as a trigger for what has happened, but I don't think this amounts to an explanation. I have three working hypotheses for what has happened. First, there is a "bad luck" hypothesis. Parex took a huge (more than a billion euros) syndicated loan in anticipation of great investment opportunities e.g. real estate in Latvia . As I understand, typically such loans are rather short term (for about two years) with the expectation of "rolling over", i.e. extending the loan being the normal practice. But then the global liquidity crunch came, and then also the financial crisis. Liquidity became extremely scarce. Creditors refused to roll over the loan and Parex couldn't liquidate enough of its assets. After all, who can sell real estate these days? Hypothesis number two is that Parex ended up with lots of toxic securities in the U.S. subprime. Hypothesis number three - the most interesting one - is that Parex accumulated too many of homegrown 'subprime loans'. Of course, the Financial and Capital Market Commission (FKTK) keeps telling us that the share of 'bad loans' in the banking system is below one percent. Then again, just a week before the same people were trying to convince us that Latvian financial system is perfectly sound. What makes the latter explanation interesting is that it may signal about the quality of the loan portfolio that the other banks have as well.

Was nationalization the right thing to do? If the alternative was to let Parex fail, then I believe authorities did the right thing. Failure of Parex would risk triggering panic and bank runs. Resulting loss of confidence in the banking system would risk plunging this country into a deep recession - not unlike the Great Depression in the 1930s. However, there is no reason to be happy about this development. State ownership means that the government pledged the taxpayers' money to pay for whatever mismanagement that has taken place in Parex. The ultimate cost to the taxpayer will depend on how sound the bank's assets are.

Finally, who, if anyone, is next? The answer to this question depends on how do we read what has happened with Parex. Was it bad luck, excessive involvement in the U.S. toxic mortgages, or too many of our very own Latvian toxic mortgages? Clearly, a combination of any of these with large short-term syndicated loans is not a very good sign.

In Latvian here

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mikelis 13.11.2008 10:12
VD:

it would have been better for everyone if there was one European guarantee, but it looked like the Germans killed such an idea, when they said that not one cent of german taxes would be used to bailout other people.
on ireland i just mean that they were the first and other countries were forced to follow to some extend lest they see deposits going to irish banks, then when it got here it seems to have caused some of the same things. Feiferis talks a little about it in today's dienas bizness. http://www.db.lv/Default2.aspx?ArticleID=f829c857-57e8-4b9c-...

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VD 13.11.2008 10:04
Mikelis:

Point taken. You got me there :)
I wasn't following all these banking details lately, but I thought only Ireland introduced a blanket guarantee on all deposits in Irish banks. Swedish government also put up some guarantees but I am not sure these are on the same scale as the Irish ones.

But it's a good point about the state guarantees nevertheless. It's all unfair competition and I wonder what DG Competition will have to say about this (I hope it will).

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mikelis 12.11.2008 18:01
to VD, but whats the difference? what does latvians depositing in irish banks have to do with it? when the bulk of latvians live in latvia where swedish banks operate.

isnt it really about ireland starting off a process that went from country to country until the asymmetry between the swedish banking package and local Latvian banks became apparent? Imagine U.S. states each having their own bailout package, there would be a flight from risk, and cross border transfers all over the place.
m.

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VD 12.11.2008 17:35
Mentor:

Is there evidence of Latvian residents withdrawing their money from local banks (e.g. Parex) and making deposits in Ireland?

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VPAREX 11.11.2008 17:27
The only possible bank with local capital to be nationalised is Aizkraukles banka, others seem to be foreign-owned. Nationalising foreign-owned banks seems to be excessive measure and history teaches, that such measures, when they are applied without proper reason, lead to long-term "inconveniences". To make it seriuous and clear, it's simply impossible, as we have no such amounts of money:). Our nationalisation legislation sets certain parametres for the process and (by the way) it obliges the bill to be put through the parliament. Surely, this is the case of immovable property, not the bank. Parex is not bought from all owners, so it's hardly can be called nationalisation both to avoid too much joy on one ideological side and too much sadness on the other:) and to be precise. I really don't know, what is the legislative basis for the deal with Parex main holders, because I'm not expert in this field. I've heard about some new legislation accepted by the parliament recently for helping needy banks, but I know no details. Thus for me there is at least one point to be interested in the deal, just for information.

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Art 11.11.2008 14:46
Another possible reason for Parex collapse could be the fact, that right before the nationalisation many state owned enterprises and local municipalities (and, rumor says also mr. Slesers) took out their deposits (if we believe mr. Feiferis, new governor of Parex).
In current financial turmoil, if someone of our political elite had knowledge about recent Parex losses as markets fell allover the world (trough connections in FKTK - Finansu un Kapitala Tirgus Komisija), and this someone had political power to force various state enterprises/municipalities to take their money out of Parex, which would hurt already injured bank enough to leave only two choices for its owners - to declare bancruptcy, thus loosing all value of stoch held and also reputations, or turn for help to Latvian government.

There could be several reasons, why this could turn out benificial for some of political powers. At first, assuming that Swedish banks have some influence in Latvian politics (Money makes the workd go round, and Swedish banks have a LOT of money in Latvian perspective), they wouldn't actually mind failure of Parex - if government would bail them out and there were no bank runs. Also, local politicans wouldnt mind taking over bank for 2 lats, placing loyal person in charge, and then tunneling all assets from bank...
It would be really interesting to check, which municipalities and state enterprises took out money from Parex, and see, from which political parties governors/board members are, but I guess such information will not become available in the nearest future.
Ok, I guess this is enough for conspiration theories...

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It is also interesting, that mr. Kargins and mr. Krasovickis will have an option, to buy back Parex for 2 lats if no strategic investor shows interest. Given information assymetry (especially, if K&K contionue to work in Parex) and the fact, that government will invest taxpayers money in bank, this looks shady.

My guess for next victim is GE Money - due to loan portfolio quality (their loans are very sensitive to economic situation).

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I guess, Parex may prove to be not the biggest waste of taxpayesr money in current downturn. I am far more concerned about government's deposit insurance for bank depositors and loan guarantees for enterprises. This may result in looting occuring in small banks and enterprises (Liepajas metalurgs being a good example, as the loan guarantee exceeds its value twice according to unofficial valuations), as owners may decide to let their enterprise go bancrupt, after tunneling away government's (taxpayers) money.

For a very good insight in looting, take a look at this paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=227162
(Akerlof, George A. and Romer, Paul M.,Looting: The Economic Underworld of Bankruptcy for Profit(April 1994). NBER Working Paper No. R1869.)

Art

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Mentor 11.11.2008 14:42
Perhaps one could think of blaming the EU for not having made a coordinated effort - Ireland went first with a blanket guarantee for Irish banks, thus luring deposits to Ireland and away from banks elsewhere. Parex suffers from not having a Swedish mother bank and although I do not have any special sympathy (or antipathy for that matter) for Parex I can see their point if they feel they have been subjected to unfair competition.

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xprt 11.11.2008 12:42
next are AB.LV and Norvik

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versatile 11.11.2008 12:39
I had heard some rumors of Parex starting to be less generous and worried about money before, therefore, when the first signals came about "a Latvian bank" it was more than clear that the bank might be Parex. I would have been extremely surprised, if it would have turned out that it is another bank...
but still.
We'll see what is going to happen. And who ends up owning the bank in a year or two...

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