World Bank warns Moldova against saving fraud-hit banks

By bne IntelliNews June 17, 2015

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The World Bank has earmarked $45mn for Moldova’s budget deficit financing in 2015, in order to prevent a sharp contraction in public investments. But the money will only be released after the government takes the right steps to address the problems in the banking sector, WB resident representative at Chisinau Alex Kremer said in a comment published by Infotag news agency on June 16.

“We recommend authorities that the three banks under special administration […] be liquidated,” Kremer stressed. Attempts to nationalise or recapitalise Banca de Economii (BEM) would increase the cost to public budget, he explained. Furthermore, this would generate the risk that taxpayers’ money is used to cover banks’ hidden losses and future losses. It is possible that part of the money owed by the bank is actually owed to the same groups that siphoned money from the bank – and in this case the recapitalisation would actually allow those firms to siphon even more public money, he explained.

The leaders of the two parties within Moldova's minority ruling coalition, Vlad Filat (PLDM) and Marian Lupu (PD), have agreed on the nationalisation of the country’s main savings bank, Banca de Economii (BEM), Timpul daily announced on June 12. BEM is one of the three troubled banks under special administration following the disappearance of an estimated $1bn from the banks.

The WB will support Moldova’s budget when it is sustainable, Kremer explained hinting at the possible cost for the public budget of the ruling coalition’s plans to recapitalise the three troubled banks. “It would not make sense and it would be irrational transferring money through the front door, while there are still high risks that money is siphoned through the back-door,”   Kremer explained.

The WB projects Moldova’s GDP will contract by 2% this year.  Nonetheless, the country’s statistics office announced 4.8% y/y expansion in Q1 driven, surprisingly, by the financial sector. The banking system’s stability nonetheless depends on  government support – namely emergency loans extended to the three troubled banks. Thus the record profitability might reflect exactly the transfers from public funds, while the fall of the three banks would have a systemic impact. Three other large banks were placed last week under special monitoring, a procedure typically used by the central bank when irregular operations are spotted or where the financial situation is fragile.

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