Lithuania and EBRD wrap up rapid Ukio response

By bne IntelliNews March 5, 2013

bne -

Continuing the rapid push to clean up the mess at what was Lithuania's sixth-largest bank, six former Ukio Bankas branches on March 5 were reopened by new owner Siauliu Bankas, with another 19 to follow. The grand reopening comes a day after Siauliu, which is backed by the European Bank for Reconstruction and Development (EBRD), bought an entire special issue of government bonds that were issued to finance the deposit guarantee fund.

Ukio's operations were suspended on February 12 due to concern at the Bank of Lithuania over the size and quality of its capital and loans. A state administrator quickly warned that liabilities were far in excess of assets. Having apparently learned valuable lessons during its much criticized delayed response to the problems at Snoras Bankas, which collapsed in late 2011, the regulator swiftly agreed to sell Ukio's good assets to Siauliu on February 24.

The buyer has also done its part to rush through the clean-up and reduce the risk to the wider Baltic banking sector and economy. By taking over LTL2.7bn (€782m) in insured deposits of the insolvent Ukio in a deal that almost doubled its size, Siauliu cut the related payout by the state deposit-insurance fund to a total of LTL800m. The fund will seek to recover its money through bankruptcy proceedings for the Ukio assets not taken over by Siauliu, the Finance Ministry has said.

Siauliu - which was aided by a €20m subordinate loan from its largest shareholder, the EBRD with a 19.6% stake - said in a statement on March 4 that it will start the reopening of Ukio's 25 former branches immediately. Now Lithuania's fifth largest bank, Siauliu also announced the same day that it bought LTL799m of state debt in a private bond sale by the finance ministry, according to Bloomberg.

The cash will be used to fund the payouts by the deposit guarantee fund, to which Vilnius agreed to lend LTL800m on February 20 at an interest rate of 2.801%. The private issue, kept within the confines of direct participants in the rescue, neatly avoids the need to carry out an extra issue on the international or domestic debt markets, and rules out the risk that the latest drama in Lithuanian banking could raise the sovereign's borrowing costs.

US rating agency Standard & Poor's last week praised the response to the latest bank collapse in Lithuania. "The authorities' response serves as a demonstration of strength," it said in a report on February 27. "We expect the sale of Ukio's stronger assets and guaranteed deposits to Siauliu Bankas to be managed without causing a major disruption in the sector, nor resulting in significant system-wide withdrawals of deposits."

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