Moldova will have to settle the issue of losses in the banking system before the International Monetary Fund (IMF) executive board discusses the three-year agreement with the country in October, Prime Minister Pavel Filip revealed on August 1 at the press conference on the country’s progress on meeting the targets set under the Association Agreement with the European Union.
This means that the agreement with the IMF is far from a done deal and consequently the disbursement of the financing from Moldova's other development partners is under question. Filip has already announced that Romania’s Prime Minister Dacian Ciolos will visit Chisinau in late August or early September for the endorsement of the first €60mn tranche of the €150mn financing promised.
Under discussion is the MDL13.6bn ($690mn) emergency loan extended by the central bank to three troubled banks and guaranteed by the government, which wants to convert it into government bonds with maturities of up to 25 years. Parliament speaker Andrian Candu has claimed that some MDL5bn of this would be recovered from those indicted in connection to frauds that resulted in the money being siphoned off from the three banks.
However, so far a Moldovan court has confiscated assets worth only €36mn from former Prime Minister Vlad Filat out of the €250mn businessman Ilan Shor claimed to have given him as a bribe.
Shor, formerly head of the managing board at Banca de Economii (BEM) – the main source of the funds siphoned from the three failed banks – claimed that the losses in the banking system were in fact $625mn (and not $1bn): a $250mn bribe given to Flat and $375mn non-performing loans inherited by his management from former BEM manager Grigore Gagichevici. Shor was identified by the investigation firm Kroll as the visible beneficiary of the funds siphoned from the Moldovan banks in the frauds that culminated in 2014.
The International Monetary Fund (IMF) announced on July 26 that it had reached a staff-level agreement with Moldova over a future three-year programme with $180mn financing attached. Consideration by the executive board is expected in October, following the authorities’ implementation of a number of prior actions, the Fund said without naming the prior actions. One of these seems to be the tricky issue of the $690mn government guarantees settlement.
Filip’s statement means that the final approval depends on the settlement of the loss in the banking system caused by the three banks currently under liquidation. And this is far from an easy task in a year of presidential elections and given the fragility of the ruling coalition.
Technically, the MDL13.6bn – some $920mn when the money was siphoned off in November 2014 - are worth only $690mn at the current exchange rate.
The differential between the emergency loan’s value at the time of issuance and at present, irrespective of how it is calculated, has already been accepted as loss by the central bank. The government has been paying costs of up to 25% for the short term debt raised from the money market during the last year, while the central bank was charging only 1% interest for the emergency loans from the three banks.
Whether the differential is calculated as the losses caused by the exchange rate variation or as the losses generated by lending at below-market interest rates to the three banks, the central bank has incurred most of the $230mn differential.
Indeed, the emergency loans were not issued in November, but in December 2014 and March 2015 (after the local currency had already weakened), meaning that the loss incurred by the central bank was slightly lower. But it is still a significant loss, equivalent to some 11% of the country’s GDP.
On June 13, Moldova’s government endorsed and submitted to lawmakers for approval a bill on the planned issuance of MDL13.6bn ($620mn) of government bonds, which the government will use to repay the central bank for the emergency aid extended to the three troubled banks in 2014-2015. The service of the 25-year bond is estimated at 0.5% of GDP during 2017-2019, for 5% interest paid by the government.
Lawmakers have called for public debates on the issue which, given the population's anger over the thefts in the banking system and low living standards, means de facto rejection of the bill. The lawmakers’ move, announced by the leader of the opposition pro-Russian Socialist Party Igor Dodon who is a member of the committee, has a political dimension as well. Presidential elections are scheduled for October 30 and Dodon is the leading candidate.
The government required lawmakers to review and vote on the bill under emergency procedures. The volume of the bonds will be adjusted if any funds are recovered from the three troubled banks, the government said.
Liquidation procedures have been launched at the three banks - Banca de Economii, Banca Sociala and Unibank.
The bonds will have maturities of between one and 25 years and the coupon was set at 1.4% for maturities of one to nine years and 5.3% for longer maturities. The coupon paid by the government on the bonds was calculated based on the central bank’s inflation targeting policy, under which the monetary authority envisages long-term inflation of 5% p.a., the government explained.
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