Latvia Government Takes Control of Parex to Bolster Bank System

By Aaron Eglitis

Nov. 9 (Bloomberg) -- The Latvian government took control of Parex Banka AS, the country's second biggest lender, to safeguard the financial system, Prime Minister Ivars Godmanis said.

Latvijas Hipoteku Un Zemes Banka AS, the only state-owned lender in the Baltic nation, will buy 51 percent of Parex for 2 lati ($3.60), the Finance Ministry said in a statement yesterday.

Investors fleeing the worst financial crisis since the Great Depression have pulled funding from emerging markets, looking for safer assets. Parex had about 775 million euros ($989 million) in syndicated credits that it would have to pay back next year.

``If the state did not help Parex then it would cost the country billions,'' Finance Minister Atis Slakteris said at a press conference in Riga. ``The decision was to either allow a bankruptcy or ensure the bank's stability,'' he said.

State-controlled enterprises including Latvijas Valsts Mezi AS, the forestry company, Latvenergo AS, the country's electricity provider and the television and radio center had deposits in Parex, he said.

Godmanis said no similar action was planned for other banks.

The government previously announced a plan for loan guarantees to ease funding pressures for local lenders, who finance their operations with syndicated loans, after Sweden offered a similar program that covered units of Swedish banks in the Baltics.

`Not Functioning'

Latvia's central bank said on Nov. 3 that about 1.2 billion euros ($1.53 billion) in syndicated loans come due next year.

The syndicated loan market ``was not functioning at all, you can't call it a market,'' said Martins Jaunarajs, Parex Banka's senior vice-president, by telephone before the announcement.

Parex Chairman of the Board Valery Kargin will be replaced by a state appointment, the Finance Ministry said.

The Baltic country's economy contracted 4.2 percent in the third quarter after expanding 10.3 percent last year before soaring inflation damped purchasing power and tighter credit led to a drop in housing prices.

Moody's Investors Service on Nov. 7 downgraded Latvia's credit rating to A3 from A2, the third-lowest investment grade level, citing a worsening global liquidity crunch and economic slowdown.

Parex Banka, rated BB+ by Fitch Ratings, has 1.9 billion lati in deposits, the biggest deposit base in the country, according to the Latvian Association of Commercial Banks.

Valery Kargin and Viktor Krasovicki each owned 42 percent of the lender, with East Capital Funds owning about 4 percent, Danske Capital Funds controlling 2.7 percent and Julius Baer International Equity Fund owning about 2 percent, according to Parex's Web site. Firebird Funds had about 1.8 percent and Swenska Handelsbanken AB had about 0.3 percent of Parex.

To contact the reporters on this story: Aaron Eglitis in Riga, Lia, at aeglitis@bloomberg.net