Pros and cons of the Government involvement in the banking sector: Case of the Parex Bank
A very important matter to understand is when the nationalization* of Parex Bank happened. It happened at the beginning of an economic recession* when many businesses and individuals started taking money out of Parex bank with the fear that the bank might bankrupt. With this fright of bankrupt, more than 60 million Lats were taken out of Parex within a week by Latvians who has money saved in Parex.
Pros: Without the nationalization of Parex Bank, Parex Bank would have surely bankrupted. Because of the government taking control of 51% of the bank and investing large sums of money into the bank, it was able to continue working and not bankrupt. If the government would have decided not to do anything about Parex and simply let Parex deal with its own problems, then soon they would have realized that Parex problems have turned into their own problems. “Finance Minister Atis Slakteris underlined that the government had no choice but to take action in order to save Latvia's financial system.”( www.baltic-course.com). If Parex would have bankrupted, it would have led to a chain of events in the Latvian economy. Latvians would have lost their savings that they had stored in Parex which means that soon many people wouldn’t be able to pay for their homes, electricity, water etc. Also businesses that had money saved in Parex would soon realize that their money is gone and they wouldn’t be able to pay their own bills and most likely would bankrupt. The problem was that there was too much money from Latvians in Parex to let it bankrupt and if the government wouldn’t have injected money in the bank then it would have bankrupted.
Cons: The problem for the Latvian government was that it itself was experiencing a down slide and was short on money. The money that went to Parex came from tax payers which mean that it was taken from the Latvian budget which was short on money itself. Also a huge disadvantage is that the money invested in Parex will not be earned back in the nearby future. The government hopes that the bank will be able to earn money again in the future; but the bank will not bring profit in the nearby future during the time when the Latvian budget that is injecting money in Parex has a huge debt itself.
I believe that it was a right decision to nationalize Parex and inject money into it even though the Latvian budget was experiencing a debt itself. The problem was that if Parex would have bankrupted it would have started a chain of events in Latvia, similar to the Lehman Brothers in the US, when once one business bankrupted so did the next one and then the next one, etc.
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