Mike Collier in Riga -

Following a surprise move from the Latvian government on the weekend of November 8-9 that resulted in the effective privatisation of Parex Banka, the country's largest indigenous financial institution, speculation has inevitably turned to whether more Baltic banks will need state assistance. If a bank with the slick, professional reputation of Parex can find itself out of its depth, it seems a fair assumption that smaller banks that have strayed into deep waters might also need a lifeline.

First the good news: Estonia seems immune for the simple reason that there is very little that could be described as an Estonian-owned financial sector. While the northernmost of the Baltic states does possess some home-grown investment banks (who have already pulled in their horns, with GILD Bankers freezing its Arbitrage fund for six months, for example), most of its retail banking sector isn't even eligible for state support - in Estonia at least.

As Neil Shearing of Capital Economics says: "Almost all of the Estonian banking sector and just over 90% of the Lithuanian banking sector is owned by foreign institutions. By contrast, only two-thirds of the Latvian banking sector is foreign owned. Of the third that remains in domestic hands, Parex accounts for well over half."

So at least the problems presented by Parex should be the biggest ones out there - unlike the situation in the US and UK where progressively larger institutions required progressively larger bailouts. Provided Scandinavian banks such as Swedbank, SEB and Nordea don't decide to cut the Baltics loose from their balance sheets, a complete shipwreck in the Baltic financial sector should be avoided.

"I will survive"

However, it's still not certain that Parex will survive, even with government backing. "Policymakers are hoping that a government guarantee will enable Parex to roll over $1bn worth of syndicated loans that are due to mature next year. But this is a huge sum, equivalent to just under 5% of GDP. If global credit markets remain frozen, Parex could still struggle to raise financing despite a government guarantee," Shearing believes.

Back in Latvia, there are still a few things to worry about, despite officials saying further bailouts are "not expected." For a start, with 25 banks officially registered in the country there are more potential banana skins. But most of these institutions are fairly insignificant boutique banks or business banks more worried about the general economic downturn than any big market plays coming back to haunt them.

Perhaps most worthy of close scrutiny is Latvijas Krajbanka, not least because it is 83% owned by another bank that should be on any investor's watch list, Lithuania's Bankas Snoras.

Not only is Snoras the largest of the sub-Parex Baltic banks, it's been making concerted efforts to raise huge sums of cash recently. At the end of October, Snoras' authorised capital was raised from €73m to €119m by issuing 158.6m registered ordinary shares. Snoras' president, Raimondas Baranauskas, claimed the move would have only a positive effect. "It will consolidate the capital base, strengthen the trust of investors and clients, and will also allow us to expand and propel the bank's activity," he argued.

Just a few days earlier, Snoras had revealed another scheme to "consolidate the bank capital by issuing perpetual debt securities included in the capital which will be distributed in a non-public manner." In what sounded like protesting innocence a little too much, Baranauskas said Snoras had been planning to issue perpetual debt securities included in the capital "for some time." True enough, but investors must have started wondering why such a massive capital hike was needed. Such apparent prudence also made earlier moves, like a January decision to become the largest shareholder in Dutch sports carmaker Spyker, look like ridiculous and costly vanity projects launched with the credit crunch already underway.

It was noticeable that on November 10, the first day the Baltic stock markets had a chance to respond to the Parex nationalisation, bank stocks took an immediate hit, and none more so than newly-minted Snoras. Snoras shed more than 11% of its value (Krajbanka managed just a 3.7% slide), with Lithuanian-Scandinavian owned DnB NORD Bankas recording a similar-sized loss. Few even noticed that two more Lithuanian banks also suffered, Ukio Bankas was down 4.5% and Siauliu Bankas down nearly 7%.

But there's at least one "good" outcome of the Parex episode. After being subjected to repeated lectures from government and big-shot businessmen about the need to cut jobs and economise, many Latvians will have enjoyed the schadenfreude of seeing the country's two richest men, Valery Kargin and Viktors Krasovickis, forced to sell their stakes in Parex for the token sum of LVL1 (€1.40) each and being told they couldn't withdraw their money from the very bank they founded.

But maybe the mighty aren't quite as fallen as they seem - Inesis Feiferis, who became president of Parex as part of the rescue deal, told bne that Kargin and Krasovickis have a first option on buying back the bank after a year - and that might even be at the same token price they sold it for. If that does transpire, the humiliation of having to sell up starts to look like a masterpiece of strategy, allowing the Latvian government to hold Parex in trust for a year, while the two 'K's take a year's holiday then return to a company that's back on a firm financial footing with liquidity markets operating normally again.

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