Latvia's largest indigenous bank, Parex Banka, confirmed that it was seeking government help in what amounts to a partial nationalization in a surprise move on Sunday morning, dpa reported.
Parex Banka is the second largest bank overall in the Baltic country. It posted profits of more than 12 million lats (22 million dollars) in the first nine months of 2008.
A statement released by Parex in the early hours of Sunday morning said, "In accordance with the terms of the agreement between the bank and the Latvian state, 51 per cent of Parex Banka's shares are being sold to the state."
Just hours earlier, Latvian Prime Minister Ivars Godmanis emerged from a marathon meeting with finance minister Atis Slakteris to announce, "The government of Latvia today made a decision that the state will become a majority stakeholder in Parex Banka to secure the stability of Latvia's financial system."
Slakteris said the final details of the deal were still being worked out.
The seriousness of the situation into which Parex must have got itself is clear from the token sum the government will pay for its majority stake - just 2 lats.
Part of the reason the move was a surprise comes from the fact that the list of "existing shareholders" is dominated by two of Latvia's richest men, the bank's founders, Valery Kargin and Viktor Krasovitsky.
"Our clients, who have entrusted their funds to the bank, will support the government's actions," said Guntars Grinbergs, chairman of Parex's governing council.
Despite rumours sweeping the Baltic financial sector in recent weeks that a local bank might ask for a government bail-out, Parex spokespeople had repeatedly stressed the bank's healthy financial position.
As recently as October 27, a press release was boasting that deposits were growing rapidly and "the amount of deposits attracted at Parex Banka is equal to the amount of loans issued."
However, with a very active markets division as well as its retail banking arm, a lack of liquidity seems to have hit Parex hard.
Attention will now turn to smaller local banks including Aizkraukles Banka and Latvijas Krajbanka to see if they make similar requests for government support, though Godmanis said he did not expect a wave of nationalizations.
Another local bank, Hipoteku Banka, is already owned by the Latvian state and will be used as an intermediary to facilitate the Parex Banka deal.
Apart from Parex, most of the larger banks operating in Latvia including Swedbank (formerly named Hansabank), SEB and Nordea are owned by Scandinavian financial institutions, so the Latvian government would not be responsible for any bail-outs.
Forty-six per cent of the total assets of the Latvian banking sector are owned by Swedish companies.