VZCZCXRO0221
OO RUEHIK
DE RUEHRA #0526/01 2991456
ZNR UUUUU ZZH
O 261456Z OCT 09
FM AMEMBASSY RIGA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6107
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 02 RIGA 000526 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:N/A 
TAGS: EFIN ECON ECIN PGOV PREL SW LG
SUBJECT: LATVIA: POLITCAL, ECONOMIC AND TECHNICAL COMPLICATIONS 
REMAIN OBSTACLES TO PAREX BANK SALE 
 
REF: A. RIGA 516, B. RIGA 484, C. STOCKHOLM 632, D. RIGA 413 
 
RIGA 00000526  001.2 OF 002 
 
 
¶1. (SBU) Summary: Political, economic and technical barriers may 
impede the quick restructuring and sale of Parex Bank, which is a 
key to Latvia's economic recovery.  Latvia's other state-owned bank, 
Land and Mortgage Bank, is facing a deteriorating loan portfolio and 
may need additional government capital infusions. End summary. 
 
Background 
---------- 
 
¶2. (U) Parex Bank collapsed in November 2008 following a run on its 
deposits in the wake of the global financial crisis.  The government 
took a majority share of the bank in a deal that has been the 
subject of widespread scrutiny in the press and a recent State 
Auditor's Office report. The State Prosecutor's Office announced a 
criminal investigation on October 16 into the government's initial 
handling of the takeover.  The collapse of Parex precipitated 
Latvia's approach to the IMF/EC for assistance.  As a precondition 
for IMF/EC assistance, the government was forced to take complete 
control over the bank.  Following a series of audits and extensive 
review of the bank's balance sheet the EBRD recently took a 25 
percent stake in Parex. 
 
Restructuring and Sale 
---------------------- 
 
¶3. (SBU) Parex's management will present a draft restructuring plan 
to the Cabinet on October 27-28 and is hoping to secure the European 
Commission's sign-off on the same plan by November 15. In a meeting 
with Ambassador Garber, Parex Chairman Nils Melngailis outlined an 
ambitious plan to sell Parex's restructured components (a commercial 
bank and a non-core, non-performing asset fund) within 6-9 months. 
Melngailis hopes to limit the government's liability exposure to LVL 
400 million (USD 800 million), down from the current level of LVL 
1.2 billion (USD 2.5 billion), which includes equity, deposits, and 
sovereign credit guarantees on syndicated loans.  This scenario 
would see up to LVL 800 million (USD 1.6 billion) returned to the 
Latvian treasury, substantially improving the 2010 budget outlook if 
completed along Melngailis' expedited timeline. 
 
¶4. (SBU) Given the domestic and international economic climate and 
continuing uncertainty about ongoing investigations or potential 
litigation by former shareholders, there appears to be very limited 
commercial appetite for Parex, either as a whole entity or for its 
restructured components. In contrast to Bank of Latvia Governor 
Ilmars Rimsevics (see reftel A), Irena Krumane, head of the Latvian 
financial regulatory authority (FCMC), the PM's office and 
Melngailis all believe that the bank cannot be sold as a single 
entity.  Melngailis said that a number of third country banks are 
looking at Parex as a gateway into the European banking market, but 
noted that none of these banks are Russian as many have speculated. 
However, he admitted that the ongoing investigations have already 
scared away a couple of investors. Melngailis said there is, 
nonetheless, some interest in the non-performing asset fund. 
Specifically, Parex is hoping that the IFC will come in as the 
anchor investor in the fund, which was valued by Melngailis at 
roughly LVL 1 billion (USD 2 billion).  Ultimately, Latvia's ability 
to recoup its remaining exposure to the fund will depend on asset 
price fluctuations over the next 5-7 years. 
 
Land and Mortgage Bank: a Second Parex? 
--------------------------------------- 
 
¶5. (SBU) The FCMC told us that Latvia's other state-owned bank, the 
Land and Mortgage Bank (LMB), may also soon run into serious 
difficulties. Melngailis independently confirmed that LMB's problems 
are much worse than currently reflected on its balance sheet. 
According to the FCMC, without capital injections, by mid-2010 the 
bank's capital adequacy ratio will be deficient.  As a result, the 
government is considering a restructuring for LMB.  Parex and the 
PM's office are both considering the potential of combining the bad 
assets from LMB (LVL 1.5 billion/USD 3 billion) into the 
non-performing asset fund created for Parex. However, the FCMC said 
it would not support such a move, citing transparency and 
complications involving the ERBD's investment in Parex. 
 
Sale Key to Recovery 
-------------------- 
 
¶6. (SBU) The successful restructuring and sale of Parex remains a 
key to Latvia's economic recovery.  The sale of Parex would 
immediately improve the country's credit rating and ameliorate the 
2010 budget outlook. Failure would put additional pressure on the 
already strained budget as the bank will likely need additional 
capital injections and the government is still on the hook for its 
syndicated loan guarantees.  According to the FCMC, Parex is too 
weak to pay any share of the roughly LVL 200 million (USD 400 
million) installment due in February, but Melngailis believes Parex 
could pay LVL 100 million (USD 200 million). 
 
RIGA 00000526  002.2 OF 002 
 
 
 
Political Maneuvering Could Delay or Derail Progress 
--------------------------------------------- ------- 
 
¶7. (SBU) The PM's office expressed concern that some political 
parties may seek to delay action on Parex's restructuring out of 
fear that the current government could claim credit and strengthen 
their electoral prospects.  While there is widespread political 
agreement that the sale is a key to Latvia's economic recovery, the 
political instability of the current coalition, coupled with the 
ongoing criminal investigations and the highly charged political 
debate over how the takeover was handled, may all combine to delay 
or derail any deal.  Such a scenario would also act as a drag on any 
incipient economic recovery. 
 
GARBER