Banks, Budget, Financial Services, Latvia, Taxation

The Audit Office has concluded its audit of the Parex banka takeover deal, and will publish its conclusions later this week, informs LETA.

The Audit Office ascertained that, at the expense of Latvia's state budget, Parex banka owners Valerijs Kargins and Viktors Krasovickis were able to settle their liabilities to depositors and solve problems with returning the bank's syndicated loans. Kargins and Krasovickis, even if they concealed something, cannot be held responsible, TV3 reported.

Kargins, Krasovickis and their relatives have a total of nine deposit accounts in the bank, which earn them LVL 380,000 a month. They did not have to sell their villas and cars. The Audit Office has also established that 60 percent of depositors at Parex banka were not citizens of Latvia, and that the money that the state deposited in the bank at end-November last year has left Latvia.

The decision on investing state budget money in Parex banka was made on November 8 last year, but Parex banka transactions were only limited on December 1, by which time more than a billion lats were withdrawn from Parex banka, according to the Audit Office's estimates.

It also turns out that Parex banka loan portfolio is not as sound as officials have said. The loan portfolio includes impaired loans as well as state-underwritten loans.

Furthermore, several laws may have been breached in the Parex banka takeover deal. For instance, the State Treasury carried out the finance minister's orders and conducted operations, that may have been illegal.

The loan agreement with the International Monetary Fund at end-2008 was also counter to the law on the state budget. The law on the 2008 state budget stipulated that Latvia's external debt must not exceed LVL 1.68 billion, but with the loan agreement this amount was exceeded by LVL 960 million.

The Audit Office has concluded that, in rescuing Parex banka, LVL 674 million was withdrawn from the Latvian economy and deposited at the bank for a few weeks at the end of 2008, which the state might never get back. This amount was to be returned in July or August this year, but only LVL 50 million and EUR 9 million (LVL 6.3 million) was repaid. The Audit Office informs that LVL 674 million is equal to 37 percent of the planned tax revenue this year.

In order to invest money in Parex banka, the state had to borrow, which increased government debt from 6 percent to 38 percent. In order to find money fast, the State Treasury had to resort to unprofitable deals – sale of government bonds incurred an LVL 6 million loss for the state.

Because of the borrowing by the state, loan interest rates at Latvian commercial banks increased to up to 15.24 percent a year. All floating rate loan recipients suffered as a result.

The Audit Office estimates that the technical costs of Parex banka takeover deal reached LVL 1,012,646 by June 30 this year.

Furthermore, Parex banka's current management and their consultants cost at least LVL 100,000 a month at the moment.

The Audit Office also strongly criticizes the Financial and Capital Market Commission, headed by Irena Krumane. The commission did not provide systematic analysis of Parex banka liquidity problems and did not try to stop the situation at the bank from deteriorating. This indicates that the Latvian banking supervision system is unprofessional.

As reported, Parex banka posted LVL 124 million loss in 2008, and a net loss of LVL 6.9 million in the first quarter this year.

"Parex bank" was established in 1992, the bank currently has branches all over Latvia that employ a total of 2200 people. The bank has representative offices, branches and subsidiaries in 15 countries.

At the moment, the Latvian Privatization Agency holds more than 70% of Parex banka shares, whereas European Bank for Reconstruction and Development has a 25% stake.