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2:21 PM
The Pros and Cons of Bailing out Banks: The Case of Parex Bank
As always, let's start with the pros of the government bailing out (nationalizing*) Parex bank, and just in general, bailing out businesses.

First, this is the only way that the bank can be kept alive. Since this was the largest nationally owned bank (one that is not a nordic immigrant bank), it would wreck the already weak Latvian economy, leaving irreversible effects on the Latvian, as well as possibly neighboring countries’ economies. This can be confirmed by a Moody’s report, saying that, "Latvia and Hungary were stabilizing but that their economies remained fragile. The problem is high debt levels, which is restraining consumer spending.” This means that if the Latvian government hadn’t bailed out the bank, and returned some money into circulation to cover debts, it would probably have left the Latvian economy in something far worse than the already present crisis, with the PPF* decreasing even more than it already had decreased.

Another positive thing about bailing out Parex, was hope to evade the risk of losing liquidity* as said by the Financial and Capital Market Commission, that 28.10.2008, "The Bank’s liquidity indicator was 7,89%, falling below the regulatory minimum (8%).”. Finally, as people were continuing to withdraw from the bank, it needed to prove itself more or less stable to put an end to the withdrawals, which were "240m lats ” according to the Financial Times, and as "a Latvian official said on Sunday (November 9) people had last week withdrawn 60 million LVL in the space of a few days.” (ITNSource). Seeing the tragic withdrawals, Parex feared great foreign withdrawals (See NY Times quote below), and needed assistance.

Then the cons,
First of all, even with a bank having funds again, the bank might not want to start giving such loans anymore, as they do not want to keep pushing at the same problem - being stuck with property that nobody wants anymore, as they are unable to pay. Additionally, the value of these assets falls. Second, the money which is used to pay for the bailout, is tax payer money, so technically, once a bank is bailed out, the tax payers need to hold the burden. Next, nationalizing a bank removes shareholders – and might bring a bank under politician’s control, just as it has happened before numerous times, as seen in the United States „Full nationalization of banks, such as Citigroup Bank and Bank of America would wipe out shareholders.” (Reuters).

An example is, "In September 1991, the Ethics Committee held liable 269 House members who had abused the bank with significant overdrafts.” (The Washington Note). Here the US government, holding 40% of stock in the Citigroup bank, dominated it, and had more than 250 of the 450 House Representatives take advantage of the bank.

With the largest locally owned bank being nationalized, it seems that the Latvia might be leaning back to the long forgotten Command Economy that was present up until the late 90s, when most of the Latvian factories, on their path downhill to disaster, were almost purely, nationally owned. However, those companies, such as the Red Star, a light motor vehicle factory was sold to foreigners, as it had been in large debts for years. However, with Parex bank the opposite occurs: A privately held bank, on the verge of bankruptcy, is bought out by the government. Here, the risks of a slightly mixed economy*, increasing in its share of a command economy* aren’t as great as with a factory, as money isn’t technology that so much becomes unusable, and a bank is still somewhat controlled by consumers, other than a nationalized factory, which might just produce something unusable. With the bank nationalized, capital might injected into companies, making them highly depended on the beliefs of the command economy planners, and some businesses might become government owned, just like the bank (since bailing out a bank is just like bailing out businesses credited by the bank)

Another huge disadvantage is that the bank will probability be unable to repay this debt, with deposits continuing to be withdrawn, as confirmed by The New York Times, "Fitch believes the current global economic climate will make a rapid sale of the bank difficult and that it will be unable to refinance the syndicated loans. Moreover, the risk of further deposit withdrawals from Parex bank, especially by non-residents, will continue;”. Not only might this mean that the money is never returned, instead, more money might need to be poured into the bank.

Taking a look at the Opportunity Costs* of the government bailing out the bank, and not bailing it out, there are differences of mind, of what could have happened. With the bank bailed out, the opportunity cost would be a shattered economy, with most small credited businesses and households going completely bankrupt.

Conclusively, it seems obvious that the Latvian government had no other choice – on the eve of a national catastrophe, the government was good to act fast, and luckily make the correct decisions. Bailing out a bank, is the same as bailing out businesses, as the banks are the ones to provide capital* mainly to businesses. So, without the government nationalizing and bailing out Parex, Latvian economy would probably not be in recession* at this moment, and it would take years to reach it.

*Liquidity refers to how quickly and cheaply an asset can be converted into cash. Money (in the form of cash) is the most liquid asset. Assets that generally can only be sold after a long exhaustive search for a buyer are known as illiquid. (about.com)
*Nationalization is the act of the government taking control of a previously non government, or partially government organization or business.
*Command Economy refers to a centrally planned and controlled economy, that is much rather controlled by an appointed governmental group.
*Free (Market) Economy refers to an economy that is controlled by changes in the market, and adjust to supply and and demand.
*Economic Recession is defined as the phase of recovery from economic instability, such as an economic crisis.
*Capital refers to monetary funds invested in a business or organization to enable successful function.
PPF* The Production Possibility Frontier is an estimate of how much goods/services a country can provide at a given time period.
Opportunity Cost* is the amount that one could have made by making a different investment or a different choice.

Some Useful Informatory Sources to Look at:
http://en.wikipedia.org/wiki/Parex_Bank (1)
http://ftalphaville.ft.com/blog/2008/11/10/18000/latvia-takes-over-parex-after-bank-run/ (2)
http://www.reuters.com/article/idUSL860214520081108 (3)
http://www.parexgroup.com/en/home/news/index.php?id426=17006 (4)
http://www.parexgroup.com/en/home/news/index.php?id426=17006 (5)
http://en.wikinews.org/wiki/Latvian_government_takes_majority_stake_in_Parex_Bank (6)
http://www.articlesbase.com/banking-articles/disadvantages-of-bank-nationalizaton-811339.html (7)
http://www.itnsource.com/shotlist/RTV/2008/11/13/RTV3373108/?v=1 (8)
http://economictimes.indiatimes.com/news/international-business/Latvia-reassures-on-bank-amid-fear-of-new-crisis/articleshow/3692463.cms
http://www.fktk.lv/en/publications/other_publications/2009-05-15_overview_of_jsc_parex_ba/
http://www.parexgroup.com/en/home/news/index.php?id426=17006
http://www.thewashingtonnote.com/archives/2009/02/james_k_glassma/

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