In retrospect, experts said he did too little, too late, but
taking on Prva at all put the central banker on a collision
course with the country's most powerful men. Prva was about half
owned by the family of Prime Minister Milo Djukanovic. By the
end of 2008, Milo's brother Aco was by far the largest
shareholder with 46 percent; Milo had 2.86 percent, and their
sister Ana had one percent, according to a U.S. embassy cable
from February 2009. Montenegrin state power group EPCG owns more
than 18 percent of the bank.
In 2007, Milo Djukanovic -- at that point between stints as
prime minister -- used what he was about to own in the bank as
collateral to get a loan to buy shares in Prva Banka, according
to a U.S. diplomatic cable.
Typically banks would reject the acquired object as the
entire collateral because the purchased asset could decline in
But Milo Djukanovic "took a 1.5 million euro loan from an
obscure London bank to purchase shares in Prva Banka through his
company Capital Invest," a U.S. diplomat wrote in a 2009 cable.
THE COLLAPSE-AND A RESCUE
In a small country where family and social connections
matter and business often takes place at cafes and restaurants,
fortified by coffee, drink and cigarettes, it's fair to say that
transactions may not always conform to international standards.
During the boom years, deals commonly came with some sort of
kickback, according to two private banking officials, who spoke
on condition of anonymity. Corruption was so commonplace, they
added, that it became part of a bank's lending process as well.
"They just kept pouring in, the bribes," says one banker who
expressed concern about the practice. "It could be anywhere from
five to 25 percent," of the overall value of the loan. "There
was no real percentage -- it was at the discretion of the
A prospective borrower might telephone with a seemingly
innocuous question. "Shall we see each other?" the person might
ask, or "should we have a coffee?", according to an official who
received such calls. Another says a bank would often receive a
"thank you" gift after approving a loan, such as flowers or a
bottle of wine accompanied by an envelope of cash.
It worked, until it didn't. When Lehman Brothers collapsed
in September 2008, the resulting global financial crisis led to
a run on Montenegrin banks, with depositors pulling 30 percent
of their holdings, according to Krgovic. As a major lender, Prva
Banka was badly affected.
To calm the markets, the Montenegrin government guaranteed
all personal and business deposits without limit. Prva Banka
received special support. In December 2008, the government gave
the bank an emergency liquidity loan of 44 million euros, which
Prva has since repaid. Djukanovic, who was by then prime
minister again, has repeatedly said he acted in the best
interests of Montenegro, not his own portfolio.
In a December 2009 Reuters interview, Djukanovic said that
he had sold off most of his shares in Prva Banka before the
start of the world financial crisis. "It was a good situation on
the market, so I could sell them and pay off the bank to which I
was indebted," he said.
He also defended the government's loan to the bank. "I
understand that the circumstances that my brother is one of the
biggest or the biggest owners of the bank was especially
intriguing," he said in December 2009. "But I don't understand
the request that the bank should sink. We should extend a hand
to whatever bank needs help, whoever are its shareholders."
Despite repeated requests, Djukanovic was not available for
comment on this story. A spokesman for his political party cited
his busy schedule ahead of an upcoming party congress.
Prva Banka officials have consistently denied that it
received special treatment. CEO Predrag Drecun, in charge since
August 2009, rejects the charge of favouritism. Deposits from
the electricity generator and supplier EPCG account for about a
quarter of Prva's portfolio while another 10 percent come from
state entities, he told Reuters. "It is ridiculous; this opinion
is a burden on this bank. Everybody thinks you are privileged,
that you have a start advantage. No. We have no mother bank.
This is our... disadvantage in relation to other banks," he
But according to Krgovic and other critics of the
government, including officials at rival banks, government
entities to this day favour Prva by keeping large short-term
deposits there earning little interest even as the government
has taken out expensive loans elsewhere. Unlike neighbours
Serbia, Kosovo, Bosnia and Macedonia, Montenegro did not take an
IMF loan that offered cheaper rates than commercial borrowing
but would have come with stringent conditions, including tough
banking regulations. It has turned to more expensive Eurobonds
"Why are we paying eight percent to borrow, when we are
keeping so much money in that bank?" asks Krgovic.
THE END GAME
International officials, investors and local rivals have
long expressed concern about the impact of Prva Banka on
Montenegro's economy. "It has proven a challenge for public
institutions to make certain that commercial banks are treated
uniformly, irrespective of whether they have close personal
links to the executive," Olters of the World Bank told Reuters.
Nobody understands that challenge better than Krgovic. In
October 2008, just before Prva took its 44 million euro
government loan, the central bank barred it from making new
Krgovic had known Djukanovic since their university days and
later served as the prime minister's economic adviser. But it
was time to act. The special treatment, he argued, had cost "a
huge amount of public money" and if the country's central bank
did not function as an adequate regulator Prva's problems could
infect the broader economy.
It was a fight he was destined to lose. After the central
bank's decision to bar Prva Banka from making new loans, Krgovic
says a key Prva bank official met some of his close friends to
pass along a message: desist or lose your job.
"They said I will pay -- what am I doing?" he recounted.
"They wanted special treatment."
Bank CEO Drecun declined to comment when asked about
Krgovic's description of this attempted intimidation.
Last October, soon after parliament shortened his second
six-year mandate, Krgovic was replaced by Radoje Zugic, who had
stepped down from the Prva Banka board just months earlier. This
February, the ban on Prva making new loans was partially lifted.
A PROBLEM FOR EUROPE
As his German shepherd barks from inside a cage at the foot
of the house, Krgovic reflects on what he left behind. He had
earned 3,800 euros a month after tax as central bank governor, a
princely sum in such a poor country. He had jetted around the
world as part of government delegations. He had been driven
everywhere in his own government car. Now he drives himself in a
second-hand Volkswagen Passat.
"It was a one-year public war," he said. "I spent 10 years
to build the institution, to build confidence. What did I get in
"I spent the best part of my life and what are the results?"
he continued. "Politicians including Milo want to control
everything; I tried to develop a different part of the system,
according to the law."
Radoje Zugic, the new central bank governor, criticises his
predecessor for failing to stop the real estate bubble and rein
in overheating banks. "In retrospect, we can say that one should
probably have reacted earlier," he told Reuters.
Igor Luksic, who took over as prime minister last December,
says that the image of Montenegro as corrupt is misleading. "I
just don't believe in many stories that I hear and I treat them
rather as gossip," he said. But in its annual report on
Montenegro last November, the European Commission said
"corruption remains prevalent in many areas and constitutes a
particularly serious problem." EU concerns about crime and rule
of law are one of several key issues slowing the progress of the
region, including in Croatia, which is next in line to win
membership in the bloc.
Investors have repeatedly said corruption, a lack of
transparency, and uncertainty over whether they can gain a fair
and speedy hearing in the court system if a deal goes bad have
deterred many from coming to the emerging Balkans.
"Someday, somebody will be guilty for this," says Krgovic.
Luksic, the new prime minister, plays down the differences
between the former central banker and the country's leadership.
"From time to time we had policy clashes," he told Reuters. "But
I respect everything Mr. Krgovic did for 10 years as central
(Additional reporting by Peter Komnenic in Podgorica and
Justyna Pawlak in Brussels; Writing by Adam Tanner; Editing by
Sara Ledwith and Simon Robinson)