Montenegrobanka in trouble?

Settling the Score

The collapse of Montenegrobanka has marked the collapse of the Montenegrin banking system based on organized plunder and complete anarchy

AIM Podgorica, May 28, 2001

The Podgorica-based commercial bank Montenegrobanka, the largest Montenegrin financial institution, has come under the close scrutiny of Montenegro's central bank and the U.S. Price Waterhouse. The reason why of so many other banks otherwise left to themselves Montenegrobanka was selected as a special target is the fact that it has a US$500 million debt that has made both it and Montenegro illiquid.

The larger portion of the debt dates from the times of the former Yugoslavia. It involves about US$300 million in inherited debts and the so-called frozen foreign currency savings. But due to inflation-generating loans meant to prevent social unrest (and to secure peace for a handful of people), throughout the past decade Montenegrobanka, which also operated as the major bank of the Montenegrin state and of the ruling political forces, the debt has nearly doubled. This bank is responsible for over 80 percent of the Montenegrin overall debt.

The balance sheets of Montenegrobanka, the grey economy and Montenegro's bankrupt economy have thus become an indivisible issue. When at the beginning of this year Montenegrobanka's managing board decided to activate all its mortgages (and fiduciaries) in order to collect its claims, it turned out that it was easier said than done.

This is one of the reasons why experts at the Podgorica-based Institute of Strategic Studies and Forecasts estimated in the latest issue of its Monet magazine that the dire situation in this bank will grow worse. Namely, according to them, the collection of what is owed to the bank, and which at the end of last year amounted to DM72.5 million, "in all probability is highly unlikely, because most of the clients are experiencing financial trouble, which prevents them from paying off their loans."

Simultaneously, the collection of debts is even more difficult thanks to the length of lawsuits, unclear ownership structure and the undeveloped real estate market. The problem is further complicated by the fact that Montenegrobanka's biggest debtors are at the same time its major shareholders. To make matters worse there are a few liquid companies in Montenegro that are making a profit due to the political support they enjoy or are covering up their actual financial standing thanks to court rulings preventing the blocking of their accounts. When banking laws were amended last November, the banks were given until May 11 this year to adjust to the new regulations. In addition to DM5 million in initial capital, the new law requires that banks be financially sound and pay their dues. The central bank, of course, who has the authority to liquidate any illiquid bank or declare it bankrupt, should supervise all banking operations. Still, before the deadline, in mid December the Monetary Council and the central bank ordered Montenegrobanka to clear its balances and introduced measures meant to bail it out. This caused the ongoing debate on the collection of its debts and raised the issue of debts in Montenegro in general. Podgorica police filed charges against the former management of Montenegrobanka, and the state prosecutor is gathering evidence to determine whether the charges of irresponsible business conduct are grounded. So far, however, this matter has not been clarified.

The suspension of Bozidar Gazivoda at the beginning of April has raised public suspicion of the intentions of the monetary authorities. Namely, Gazivoda was dismissed on orders from the central bank's council only 10 months after being appointed Montenegrobanka's director. He was replaced by Ruzdija Tuzovic, the former head of the bank's branch office in Frankfurt. The council issued an internal order prohibiting all officials from communicating with the public, except for Goran Knezevic, assistant to the central bank director for monitoring banks. Thus the truth about what went on at Montenegrobanka was, at least temporarily and rather clumsily, hidden from the public eye.

The motives for the sudden suspension of Bozidar Gazivoda are therefore entirely unclear, particularly because no other member of the administrative board shared his fate except. Also, no board member publicly commented on the dismissal. Rash and inept, the firing left a bad impression and raised doubts as to its true nature.

Namely, the fact that the new management tolerates the measures introduced by the central bank and the monetary council, despite them being in violation of the law, supports the assumptions that the entire affair was directly linked to plans to almost certainly liquidate the bank. This move is allegedly supposed to protect the perpetrators of various shady deals, carried out in the years of so-called transition and privatization via Montenegrobanka.

This would make it possible for numerous Montenegrin "businessmen" to enter the new political era free of their sins of the past and, what is even more important, with their pockets full of legalized property, with no traces of its origin. These allegations, of course, are denied in the bank.

Shortly before his suspension Gazivoda said that Montenegrobanka cannot be liquidated because that would be tantamount to the liquidation of Montenegro's entire financial system. "Almost entire Montenegro's debt has passed through Montenegrobanka, which as a practically state-run bank, was also a transmission bank," said Gazivoda. Due to its size, it is almost on the top, and "it reflects all problems, from transition, to privatization, to the capability of new privatized companies to do business. Our problem is that our illiquidity is not our fault, but was created because our debtors were incapable or unwilling to return their debts."

After his dismissal, however, Gazivoda publicly accused members of the central Bank Council of preventing Montenegrobanka from finding a way out of the crisis. The council chairman, Ljubisa Krgovic, responded, also in a public statement. The fierce dispute between one-time friends and colleagues at the Yugoslav National Bank raised additional questions in regard to the manner in which the most important financial institution in Montenegro was to be bailed out.

Among the accusations the Central Bank Council hurled at Gazivoda was the blame for a damaging sale of the Montenegrobanka office building in London. Gazivoda allegedly sold the building for much less than it was worth despite a clear ban issued by the council on the sale of any part of the bank's property. Responding to this Gazivoda said:

"These allegations are tendentious. As general manager, I, and not they, was authorized to sell the building. They, not I, exceeded their authority. Still, I thought it fit to inform the council of that. I delivered to them all information prepared by a special committee. The report was mostly prepared by Jovan Mihajlovic in London. The sale was announced in foreign newspapers. It is not true that the building was sold for less that it was worth. All documentation on this is available. The committee for the sale was composed of several experts, whom I trust. I think that they did an excellent job."

Numerous disputes between the management of Montenegrobanka and the central bank were confirmed by an announcement by Montenegrin monetary officials published on May 15 in the Pobjeda daily. The statement stressed the readiness of the central bank and foreign consultants to assist Montenegrobanka "in establishing liquidity for ongoing transactions and added capitalization, as a basis for its sound operations in the long run." Namely, the central bank claims the other side showed no willingness to cooperate. Thus it became more than obvious that the dispute between financial experts was not contributing to efforts to "restore the trust of citizens in Montenegro's banking system."

It seems that the bank's pressure on domestic debtors to return what they owe as soon as possible has prompted strange reactions from a number of major companies. They are targeted because something can be extracted from them by force. Is this justified? Mihajlo Banjevic, director of the KAP company, one of the major debtors, claims that such pressure prejudices a court ruling on Montenegrobanka's controversial claims, based mostly on excessive interest rates.

On the other hand, warnings are heard that insolvency cannot pass without consequences. Clients are leaving. The problem is particularly serious in regard to foreign companies in Montenegro. Their financial transactions via Montenegrobanka are frozen. There are unofficial reports that an Italian client cannot access his DM15 million account.

How many such clients are there? Bad news about banks travels fast. And bad news about a state bank immediately brings up pictures of a bad and irresponsible state.

Goran Vujovic

(AIM)