Ukraine's government takes over three troubled banks

Jun 10, 2009, 10:21 GMT

Kiev - Ukraine's government on Wednesday took over three troubled banks in an effort to prevent a wider collapse of the country's financial industry.

Ukrainian taxpayers will pay the equivalent of 1.25 billion dollars to take a majority stake in Ukrhazbank, Rodvidbank, and Kiev Bank, nationalizing the three previously private firms, said Prime Minister Yulia Tymoshenko at a televised cabinet meeting.

The interventions would give Ukraine's State Property Fund, the government agency responsible for operating state-owned businesses, 99-per-cent ownership of Ukrhazbank and Rodvidbank, and 84-per-cent ownership of Kiev Bank, the Interfax news agency reported.

Newly appointed management would begin operations in the three banks next week, Tymoshenko said.

The government purchase was necessary to prevent wider instability in the nation's banking industry, and because of conditions set for Ukraine by the International Monetary Fund (IMF), Tymoshenko said.

The 1.25-billion-dollar bail-out is a substantial sum for Ukraine's cash-strapped government, which struggled earlier this week to pay off a 640-million-dollar natural gas bill to Russia.

In recent months, Ukrainian business media had widely reported that the three banks were among the country's most unstable financial institutions.

The banks' exposure were reportedly heavily exposed to energy and industrial loans, as well as to real estate investments - sectors having seen as much as a 50-per-cent price collapse since the international financial crisis struck Ukraine in October 2008.

Tymoshenko has said prevention of a widespread failure of Ukraine's banking industry is a top priority for IMF negotiators discussing further emergency loans to her government.

The Wednesday intervention to stave off the collapse of the three banks is a key pre-condition for Ukraine's receiving more IMF money, Tymoshenko said.

'I am certain we will get the next (IMF) loan tranche in June or July,' she said.

The IMF loaned Ukraine 3 billion dollars in November 2008 as the first of a planned four-tranche credit programme aimed at stabilizing the former Soviet republic's economy and promoting market reforms. Propping up Ukraine's banking sector was another condition.

Tymoshenko and her government had initially planned to use the IMF money to cover energy debt to Russia and to pay back salaries owed to government workers. But IMF pressure forced the government to funnel most of the cash into either the banking sector or the national bank.

The IMF subsequently refused to issue the second tranche as scheduled in February, citing the Ukrainian parliament's continued refusal to pass market reform legislation, particularly a modernized bank bankruptcy law.

Negotiations between Ukraine and the IMF, and the passage of some, but not all, of the reform legislation demanded by the fund led to the IMF transferring a second, 2.8-billion-dollar tranche to Kiev in April.

The third tranche of the four-part loan programme to arrive in June or July would be valued at 3.2 billion dollars. The final tranche in November would be 3.8 billion dollars, Tymoshenko predicted.

Ukraine's economy has been hard-hit by the world financial crisis, with independent analysts expecting a reduction of 9-10 per cent in GDP just during 2009.

The country's national currency, the hryvna, has fallen some 40 per cent against the US dollar since October 2008, a loss in value exceeded only by the Icelandic krona, Korrespondent magazine reported.