Moldova’s president green lights payment of banks' losses from public money

Moldova’s president green lights payment of banks' losses from public money
Moldova's President Nicolae Timofti (right) and central bank governor Sergiu Cioclea (left)
By Iulian Ernst in Bucharest October 5, 2016

Moldovan President Nicolae Timofti promulgated a bundle of seven laws on the banking sector, including one stipulating the payment from public money of the $680mn (10% of GDP) emergency aid given to three bankrupt banks, on October 4. 

The International Monetary Fund (IMF) required Moldova to tackle the issue, as well as fiscal consolidation and banking sector regulations, before discussing its three-year programme with the country in October. The promulgation prepares the ground for the agreement with the Fund, but it sparked criticism at home.

The bundle of seven laws includes an amendment to the budget to accommodate the service of the supplementary public debt this year. The budget revision stipulates a significant reduction of the central government’s spending by MDL2bn (1.5% of GDP) to MDL33.5bn, as well as shifting funds to public debt service from other projects. The bundle of laws also includes several bills needed for better regulation of the banking sector, in areas such as the transparency of banks’ ownership.

On September 26, Moldova’s government approved an emergency procedure on the repayment from the state budget of the MDL13.6bn (€610mn or $680mn) in emergency aid extended in 2014-2015 to the three failed banks. The amount is equivalent to around 10% of the country’s GDP.

Objections have been raised both to the content of the laws and to the method used to approve them. 

Moldova’s ruling coalition summoned lawmakers at short notice on the morning of October 3 to vote on the no-confidence motion submitted against the government over its plans to rush through the package using emergency procedures. Government MPs then boycotted the meeting, thus rejecting the motion and thwarting opposition plans to stage a demonstration outside the parliament. As a result of the motion being rejected, the bills were de facto endorsed by lawmakers.

The opposition Socialist Party (PSRM), which submitted the no-confidence motion, has formally asked the Constitutional Court for an opinion.

Moldova’s Ombudsman Mihai Cotorobai had officially objected to the content of the laws and the procedures used to enact them before their promulgation. He claimed that the Anticorruption Directorate (CNA) had also objected to the government’s procedures. 

Cotorobai recommended in a public opinion to Timofti, issued on October 3 immediately after ruling coalition’s procedural trick, to defer the promulgation of the laws because of several procedural and content-related irregularities.

The Ombudsman disclosed that the CNA had expressed a negative opinion on the law related to the payment of the $680mn from public funds. The Ombudsman also said the CNA, and other key public entities, were not consulted by the government over the content of the laws. The rhetoric of the Ombudsman focused on the defending the population’s rights and the unfair payment from public money of the frauds at the three banks.

The Ombudsman assured it would take all the legal steps to prevent the enactment of the laws.

In November 2014 and March 2015, the central bank extended MDL13.6bn emergency loans to the three troubled banks Banca de Economii BEM, Unibank and Banca Sociala. The loans were aimed at replacing the money stolen from the three banks. Kroll consultancy firm is still investigating the financial operations. The central bank recently claimed that Kroll had “identified” around $600mn of the stolen money. However, the central bank did not indicate whether and how much of the $600mn identified by Kroll could be eventually recovered.

In March, the government and the central bank signed a memorandum of understanding on the conversion of the emergency aid extended to three troubled banks into government bonds. The memorandum was not announced by the authorities when it was signed on March 9, but it was disclosed by consultancy Deloitte in its audit report on the 2015 financial situation of the central bank.

On June 13, Moldova’s government endorsed and submitted a bill on the planned issuance of MDL13.6bn of government bonds to lawmakers for approval. The service of the 25-year bond is estimated at 0.5% of GDP during 2017-2019, for 5% interest paid by the government.

In a note on the payment of the $680mn from public funds, Expert Grup think tank argued against the move claiming that it was not transparent and it was debatably democratically endorsed. The think tank raised the issue that the adoption of the law was not preceded by attempts to recover the money lost by the three banks. It also claimed that it would generates moral hazard, that it included provisions that are not economically grounded (specifically the 5% coupon paid by the government on the bonds issued) and finally that it was socially unfair.

Expert Grup sketches three alternative options for the government, but all of them are based on the debatable legality of the emergency loans extended by the central bank in 2014-2015 with state guarantees, on the memorandum signed between the ministry of finance on paying the money to the central bank on the behalf of the three banks (as sole guarantor) and of the emergency procedure used by the government to have the memorandum turned into a law.

The central bank extended the emergency loans based on a law (187/2014) enacted by the government under emergency procedures, which amended three key laws two months before the first emergency loan was issued in November 2014. Law 187 breaches the constitution, Expert Grup claimed. Furthermore, according to the central bank law, the monetary authority is allowed to extend emergency loans only to solvent banks – while the three banks that received the loans were far from being solvent at the time they needed the money. 

Finally, Expert Grup argues that the government abused the emergency procedures for endorsing the conversion of the emergency loans to government bonds, by preventing lawmakers’ involvement in the process. Such procedures are allowed by the constitution only under extraordinary circumstances.