"Russia is considering a banking bail-out that will go further than measures taken by the US, as fears grow that

bad loans

could paralyse the economy."







US bank bail-out

Analysts said such a plan could allow banks to declare the true level of bad loans on their balance sheets, which, once cleaned up under the programme, would break the credit squeeze and allow them to start lending again in 2010.

About $100bn (€72bn, £61bn) in domestic loans fall due by the end of the year and the central bank has said banks’ profits would be totally wiped out if non-performing loans hit 10 to 12 per cent. Standard & Poor’s warned last week problem loans could reach as high as 38 per cent.

With inflation, high interest rates, a dearth of new credit and a sharp fall in commodity prices still squeezing companies, bankers say they fear non-performing loans could hit as much as 20 per cent of overall credit portfolios by the end of the year.

International ratings agencies Moodys and S&P have warned that Russia could need to spend as much as $40bn recapitalising the banking system by the end of the year.

Under the draft bill being considered on Friday the prefs would be convertible into ordinary shares in 10 years’ time should the bank be unable to pay back the bond when it matures in 2019. The recapitalisation funds would be limited to the top 55 banks in Russia’s 1,100-strong banking system, analysts said. The draft bill says only banks with a minimum of Rbs50bn ($1.6bn, €1.4bn, £1.0bn) in assets would be eligible.



***

If the government continues to delay, “this means that many banks will just stop operations. They will continue to exist but they won’t be able to provide new loans,” Ms Orlova said.

The government fears it could spend its entire Rbs4,000bn reserve fund and more, once it begins to recapitalise the private banking sector, she added.

But Yevgeny Gavrilen­kov, chief economist at Troika Dialog, the Moscow investment bank, said it would be best if the government did not attempt to interfere in the problem but concentrated on lowering inflation instead.