RIGA, Latvia

The government of crisis-hit Latvia decided yesterday to carve out a new bank from the nationalised Parex Bank, which was taken over by the state in 2008 after a run on deposits.

“The bank is being split into two organisations,” Parex head Nils Melngailis told reporters after a government session.

The plan would involve transferring around 66 per cent of Parex’s active capital, along with more than 50 per cent of its credit portfolio, to an as-yet-unnamed new bank.

Latvian authorities hope that carving out a new bank will save the government from having to make new capital injections to keep Parex afloat and will stimulate lending in the recession-afflicted nation, said Juris Jakobsons of the Latvian Privatisation Agency.

The remaining assets would be held by Parex, which would continue to trade under its name.

“It is expected that both organisations will fulfil their obligations,” Melngailis said.

After the 2008 take-over, the government had said its goal was to restructure and sell off Parex.

Jakobsons said the plan would mean “the creation of a new bank with a stable capital base” and a focus on the Baltic region.

Melngailis said it was difficult to predict when the split would take place, pending a decision by the European Union’s executive arm, the European Commission, which acts as a competition watchdog for the 27-nation bloc.

In November 2008, Latvia nationalised Parex, the Baltic state’s largest locally-owned bank, after depositors jittery about the country’s deepening economic crisis began pulling out their cash.

A month later, Latvia was forced to turn to the European Union and the International Monetary Fund for a 7.5-billion-euro (US$10.1-billion) bailout to keep the state from financial meltdown.

The country of 2.2 million people is locked in a biting austerity drive under the terms of the rescue package.

The carve-up plan could be stalled, however, by legal action by the bank’s former stockholders, who have been critical of the government’s handling of Parex.

AFP