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International Internet Magazine. Baltic States news & analytics Saturday, 21.05.2022, 05:11

Investigations by the Dutch Parliament and EU Commission on the Parex bailout

John Christmas, former Head of International Relationships Group at Parex Bank, 26.06.2014.Print version
On June 17th, a document was tabled at the Dutch Parliament requiring a formal investigation of the 2009 sale of Parex Bank stock from the Latvian government to the European Bank for Reconstruction and Development (EBRD), specifically including the allegation that the sale was made reversible with an undisclosed “put option.”

The Dutch Parliament document references a United States Senate briefing from June 4th which was organized by the Adriatic Institute for Public Policy and Global Financial Integrity. At the briefing, I presented evidence to journalists and lawmakers that the transfer of Parex Bank stock from the Latvian government to the EBRD in 2009 and transfer of Citadele Bank stock from the Latvian government to the EBRD in 2010 may have been fraudulent.


The European Commission (EC) is also interested in the Parex bailout, but from a different angle.  On April 16th, the EC announced an investigation of loans from Latvia to Parex Bank and spun-off Citadele Bank that violate state aid rules of amount and duration.


Latvian government officials have long claimed that the bailout of Parex and the subsequent splitting of Parex into a “good bank” and “bad bank” was the same as what was done in other Crisis-stricken countries such as Ireland, however the behavior of Latvia and the EBRD and a leaked document indicate otherwise.


Latvia nationalized Parex and made loans to Parex to fund deposit withdrawals starting in late 2008. Immediately, the government began marketing Parex assets and stock to investors, however no investors were interested at the requested prices which were kept near book value.


Then, in early 2009, the government sold 22% of Parex stock to the EBRD. The government and the EBRD both announced that the sale confirmed the value of Parex.


Why did the EBRD think Parex was valuable and other potential investors didn't? I believe the answer was revealed in 2010 when website leaked a Nomura report. The report clearly indicates that the EBRD had a “put option” requiring the government to buy back the shares in the future and the plan of the government was to slowly write-off Parex assets until the bank failed.


Then, Parex spun off a “good bank” called Citadele. Citadele was capitalized by the government, and therefore belonged entirely to the government, until the government gave 25% of Citadele stock to the EBRD. This brought up two questions: why did the government give Citadele stock to the EBRD, and why didn't the government give Citadele stock to the other minority investors from Parex? Could this transaction be related to the alleged put option?


The EBRD has refused to answer these questions despite repeated requests from myself and several journalists.


Meanwhile, Parex itself became the “bad bank” and was renamed Reverta. Still now in 2014, Reverta is funded by loans from the government and the market value of the assets of Reverta is not publicly known. Therefore, taxpayers don't know what the total losses will be when the assets are eventually liquidated.


Ireland did exactly the opposite. Ireland created a “bad bank” in late 2009 and named it the National Asset Management Agency. In 2010, this agency paid 30 billion euros to buy loans from banks with a book value of 72 billion euros, thus revealing that 42 billion euros of value had been lost in the banking system. By recognizing this loss immediately, Ireland put its financial statements in compliance with Eurostat standards.


Investigations by the Dutch Parliament and European Commission will presumably shed light on the Parex bailout for concerned Latvian and European taxpayers. However, this isn't good news for the current Latvian government which is facing an election in October. Already, trust in the government is low. Only two Western banks still provide United States dollar correspondent accounts for Latvian banks following the exit of J.P. Morgan. And, the Latvian government failed in its attempt to issue bonds this past winter.

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