In mid-December of 2008, nearly three months after the failure of Lehman Brothers and the massive freeze in international money markets, Prime Minister Igor Luksic, then Minister of Finance, said they were doing the responsible thing by helping get one of their largest banks back on its feet with a temporary infusion of taxpayer money. He proclaimed the First Bank, controlled by the family of former Prime Minister of Milo Djukanovic, was healthy, but just short on cash.
However, documents obtained by the Organized Crime and Corruption Reporting Project (OCCRP) show that the bailout had a whole different purpose. It was a temporary lifeline for the bank until a more permanent solution was found.
In a statement to media, Luksic said the government would hold First Bank accountable and would have strict control over the bailout. Even though the documents show that the bank broke the terms of the contract, the government never held the bank accountable.
While the Central Bank was warning that the bank’s situation was worsening, and that the government should take over, no action was taken. Had the Central Bank gotten its way, at some point First Bank would have been seized by the state, potentially wiping out one of the first family’s large investments. But that never happened.
The bank was on life support and nobody had the authority—or the guts—to pull the plug.
Central Bank officials proved right and First Bank survives today only because of the sale of a stake of the country’s energy utility, Elektropriveda Crna Gora (EPCG), to Italian firm A2A. The sale saved the first family’s investment. But at what cost?
A Bank in Crisis
Since mid-2007, even before the international crisis, the Central Bank, the country’s primary regulator, had been warning First Bank that it was growing too fast for its own good.
According to Central Bank documents from the time, it saw a slew of problems that would cause the bank liquidity and solvency problems:
It warned that the bank was mismanaging its loan portfolio giving out too many big loans with no monthly payments on principle and interest until years later – sometimes up to four years. The bank had no income from loans at this time.
It warned that the bank had inadequate security on its loans should they go bad. Collateral was often either non-existent, insufficient or removed from the loan agreement at some point.
It warned First Bank that it was loaning too much to businesses purchasing land or doing real estate development. The concentration of loans in this sector represented a major risk in the case of an economic downturn.
It warned that the bank was giving out such good deals to some VIPs that it was losing money.
The loans First Bank was giving to the friends and business partners of the Djukanovic family were the type of loans favored by developers and property flippers – people who buy property to either develop it or hold it for a year and then sell it for a steep profit. With a booming coastal real estate market thanks to an infusion of Russian money, the loans helped Montenegro’s political elite become even richer.
By the spring of 2008, the bank was intermittently having problems meeting requests for money from its depositors, as the Central Bank had predicted. Examiners determined that the bank sent a large number of financial transfer orders outside of system working hours, which were automatically rejected. In other cases, the dates of the transaction receipts given to customers were changed to reflect the dates money was transferred rather than when depositors requested the transfer.
Still, VIP customers had easy access to loans, and the bank made payments from its own funds to get pop superstar Madonna to come to Budva even as they couldn’t pay customers.
But as summer approached, things got worse. Lehman Brothers failed on September 15, signaling the beginning of the global economic crisis. The Central Bank’s prescient warnings came true: the bank would not survive without government intervention.
Day of Reckoning
On 26 November 2008, First Bank asked Finance Minister Luksic to approve a short-term liquidity loan amounting to €44 million, as an emergency procedure. The application referred to the Law on the protection of the banking system, which had been adopted by the Parliament of Montenegro under urgent procedure only a month earlier.
When the bank asked for help, the bank’s Board of Directors was chaired by Radoje Zugic, current Governor of the Central Bank. His letter to the Ministry of Finance said that "because of disordered documents, it is very hard for the Board of Directors to determine the status of the bank." He added that the bank needed between €30 and €40 million just make good on current liabilities. In addition, he affirmed that the bank has done everything it could to resolve the problem, including suspending the persons who were largely responsible for the situation in the bank. He added that a permanent solution to the bank’s problems required a further €110 million euros.
The Central Bank control found that on the day First Bank filed the request, the it owed €33.2 million to its creditors and depositors.
In any other country, First Bank would have been seized and shut down. But the deposit guarantee made by the government made the cost of bankrupting First Bank prohibitively expensive – more than €300 million, because the government had just a month earlier passed a law guaranteeing all deposits in full.
The regulator had previously objected to such provisions, saying was excessive because most depositors would have been covered by a much lower amount.
The bailout was granted on December 11. Luksic held a press conference and said earnestly that First Bank would be under careful scrutiny because it was getting government money. He promised that if they did not follow every rule, the government would take the money away. That never happened.
On December 12, the Central Bank adopted a decision explicitly instructing the bank to plan how the bailout money would be used. The bank also appointed a person to monitor its expenditures. Almost immediately, First Bank was uncooperative.
The contract was signed on 17 December 2008, and the bank pledged to return the €44 million within three months, a maximum of one year. The money was paid, but as before, First Bank ignored the requirements of the Central Bank and continued doing what it wanted.
Although the contract stipulated that the government would terminate the contract in the instance of "misuse of funds or preventing the person appointed by the Central Bank from controlling the use of funds," that was never done.
The January 2009 Central Bank report said that despite its specific rules, "the bank has used the loan funds as it wished. Only later on did it inform the Central Bank about its activities."
In addition, according to the bailout contract, if First Bank needed an extension of the bailout, they were obliged to file a request by March 2, 2009. Ten days after that date, First Bank sent a letter to the Ministry of Finance asking for an extension and promising to pay €11 million but seeking more time for the rest.
"The postponement of the obligation ... would preserve the bank’s liquidity and ensure its normal functioning," the filing said.
The government asked the Central Bank’s opinion whether the bank’s cash position had improved under the three months of the bailout. In a letter dated March 17, 2009, Velibor Milosevic, deputy director general of the Central Bank, said an analysis showed that not only had the bank’s situation not improved, but it had actually gotten significantly worse. The Central Bank estimated the bank would now need about €110.6 million more just to stay alive.
“The information that control currently shows is that the financial state of the bank is bad and it urgently needs €75 million in additional funds just to cover the immediate obligations,” the Central Bank said in a letter to the Ministry of Finances. The bank estimated that €35 million more was needed beyond immediate funds owed.
Milosevic said that "if the bank or the government does not provide additional funds, what inevitably follows is bankruptcy or liquidation of the bank" and stressed that Government "should not extend the contract with First Bank."
However, a day before the Central Bank’s opinion arrived, Luksic approved the extension.
The Fake Bailout
When the time came to pay back the first installment, the bank was still having serious liquidity problems, just as the Central Bank had warned they would. But the payback scheme allowed First Bank to pay back the money without actually paying back anything.
On March 13, 2009, the day when the first installment of €11 million was to be repaid, First Bank started the day with only €20,000 in its accounts. Through financial manipulation, they paid back the €11 million in a way the Central bank found "very problematic."
Central Bank officials looked at records from the Real Time Gross Settlement (RTGS) system, a computer system that shows real time wire transfers. What they found was disturbing. The system showed that over a 34 minute period, the Ministry of Finance wired 11 payments of €1 million each to First Bank into the account of the public company Regional Waterworks – Montenegrin Coast. The funds that were supposed to be used for construction of regional water supply system in the maritime municipalities of Montenegro. At the exact same time, First Bank wired 11 €1 million payments to the treasury account controlled by the Ministry of Finance.
A press release from the Ministry of Finance announced First Bank had successfully paid off its first installment of its bailout loan. But that had not happened. First Bank and the government were effectively transferring First Bank’s debt to another governmental agency.
The second installment
The bank would end up making three more installments, eventually paying off the full €44 million. Two of them followed the same pattern of First Bank transfers being offset by transfers back to the account by the government. By the fourth installment, the bank had been rescued by the sale of Elektropriveda Crna Gora (EPCG).
The second installment of the loan totaling €11 million was paid by First Bank to the Treasury from June 4-12, 2009.
In the same period, the Treasury wired €6 million into the bank accounts of the Regional Waterworks and the Directorate of Public Works, according to an examination by the Central Bank.
Even after the bailout, the bank was in a difficult condition. On June 11, 2009 the Central Bank again wrote the letter concerning bank’s liquidity. In the letter Milosevic said:
"The Bank’s liquidity is at critically low levels due to insufficient liquid assets relative to liabilities... Key liquidity ratios showed deterioration. Bank Deposits are constantly dropping. Since the beginning of the year, in each reporting period, the Bank has daily liquidity indicators below the limits prescribed by the Decision on Minimum Standards for managing liquidity risks.”
Milosevic added that "First Bank is the only bank in the system which used funds from the reserve requirement and is not able to repay on maturity." At the end of April 2009 the bank’s total loss was €8.7 million.
The final installments
The bank paid the third installment totaling €11 million in the period September 14-17 2009. Again, money flowed in allowing the bank to make its payments.
The Central Bank ascertained that on the same days that First Bank repaid its debts, money had arrived from the Finance Ministry’s account.
The real bailout took place on Sept. 23, 2009 when €192.2 million from the sale of state shares of EPCG was deposited to accounts at First Bank. According to the Central Bank examiners, that was the first day that First Bank had pulled itself out of illiquidity.
The bank paid off the final installment totaling €11 million on Oct. 5, 2009.
