Bankruptcy Looms For Moldova

[Recursion]

http://www.forbes.com/sites/francescoppola/2015/07/10/bankruptcy-looms-for-tiny-moldova/

Another southeast European country is having problems, though Moldova is not constrained by the Euro and so has some options.

The tiny state of Moldova, sandwiched between Ukraine and Romania on Europe’s eastern border is in desperate financial trouble. A banking crisis has knocked a huge hole in its GDP and rendered its fiscal finances unsustainable. And the lack of a stable government means that it does not qualify for international support. The IMF canceled a visit in June, and the EU has now refused budgetary support: "Budget support payments are subject to the fulfilment of all conditions laid down in the agreements signed with the Government of the Republic of Moldova, in terms of sector policy objectives, macro-financial stability as well as respect of budgetary oversight and transparency principles. The achievement of policy goals is evaluated on the basis of benchmarks included in the budget support operations. Well-known issues around the Moldovan banking sector have raised concerns as regards macro-financial stability. In this context, the view of the European Union is that a program with the International Monetary Fund (IMF) would provide the guarantees that these concerns are being addressed. European Union budget support payments can only be processed once the IMF program is approved. As a program cannot be requested by an interim government, this issue is an additional, serious reason to accelerate the on-going process of formation of a new governing coalition."

This has all blown up rather quickly. Back in December 2014, the IMF projected respectable GDP growth of 3.5%, and Moldova seemed on course to join the EU after electing a pro-EU coalition government at the end of November. But that was before the banks collapsed.

Or rather, it was before anyone noticed the effect of the collapse. Three of Moldova’s banks – Banca de Economii Moldova, Banca Sociala and Unibank – failed November 23-27, four days before the election, due to a fraud of gigantic proportions. Writing as a guest here on Forbes, James George Jatras, manager of the Eastern Partnership Initiative of the American Institute in Ukraine, summarizes what happened: "At the end of last year, a scandal broke out following a series of statements made by several politicians that $1 billion had been embezzled from three of the country’s banks, including BEM. Fingers were pointed directly at private investors in the banks as the main culprits. The allegations spurred a popular panic and mass withdrawals of deposits in the banks concerned. The crisis reached a peak in February when the Moldavian currency (the leu) fell almost by 40% against the euro and the dollar."

The $1bn loss figure originally quoted amounted to about 12.5% of Moldova’s GDP. However, the governor of the Moldovan central bank pointed out that even a disastrous bank collapse would not usually mean 100% write-down of the assets of all the banks concerned, and adjusted the figure downwards to about $450m. But even this is a huge hit to Moldova’s economy.

[Erich Bloodaxe BSN]

1. They had their own 'too big to fail' banks, and those banks failed.

We need to learn from their problems, and break up our 'too big to fail' institutions before they fail too.