Montenegro Financial Sector Policy Based Guarantee

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This document describes EUR60 million (US$79.2 million equivalent) Financial Sector Policy Based Guarantee (FSPBG) to Montenegro in support of a comprehensive banking sector reform program. The objective of the operation is to support the authorities' efforts to strengthen the banking system and increase its resilience to possible future shocks by continuing to undertake sectoral policy reforms and system restructuring. The specific objectives of the Government's reform program are to: (i) strengthen systemic risk monitoring and the crisis management framework, (ii) address banking sector vulnerabilities, (iii) complete the restructuring of Prva Banka, (iv) enhance depositors' confidence, and (v) further improve the regulatory framework for the banking system. The program supported by the FSPBG has been implemented primarily by the Ministry of Finance (MoF) and the Central Bank of Montenegro (CBCG). The FSPBG will be used to leverage significant private sector resources, with only 60 percent of principal risk covered, or roughly 50 percent of the cash flow risk for investors, in a transaction targeting EUR100 million. The FSPBG-supported bank loan will likely cost Montenegro around 5-6 percent, generating a savings of as much as 4 percent per annum over the life of the loan. Gradual economic recovery and external adjustment ensued in 2010-2011. In this period, growth averaged about 2.5 percent per year. The 2011 growth was broad-based, supported by improving terms of trade and a good tourist season. Banks are completing their recapitalization efforts and focusing on decreasing their liquidity risk exposures by trying to raise more local deposits.