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Košice bridles at PKB bailout plan

The eastern Slovak city of Košice is in a financial crisis so deep that a consortium of creditors led by Prvá komunálná banka (First Communal Bank - PKB) of Žilina has suggested the city save money by not paying councillors for participating in council sessions.
The proposal, which has met strong opposition on Košice town council, came in late August in a package of measures PKB wanted to see the town agree to in exchange for a bailout lending package.
Košice owed 2.12 billion crowns ($45 million) at the end of June, and with one billion crowns of that due before the year and the city without a hope of meeting the obligations from its own funds, Košice technically fulfilled the conditions of 'cross default', under which all creditors could call in their debts at once.


Košice is groaning under a 2.12 billion crown debt racked up on expenses like this musical fountain.
photo: TASR

The eastern Slovak city of Košice is in a financial crisis so deep that a consortium of creditors led by Prvá komunálná banka (First Communal Bank - PKB) of Žilina has suggested the city save money by not paying councillors for participating in council sessions.

The proposal, which has met strong opposition on Košice town council, came in late August in a package of measures PKB wanted to see the town agree to in exchange for a bailout lending package.

Košice owed 2.12 billion crowns ($45 million) at the end of June, and with one billion crowns of that due before the year and the city without a hope of meeting the obligations from its own funds, Košice technically fulfilled the conditions of 'cross default', under which all creditors could call in their debts at once.

"The unpaid participation of councillors in town meetings should be a test of their solidarity with their city, which is in crisis," said Imrich Urbančík, the head of the PKB branch in Košice. "But I understand this measure may hit a somewhat sensitive spot."

Tough terms

Urbančík explained that the bailout package was the result of over a year's negotiations between city leaders and PKB. The bank proposes to lend 1.2 billion crowns to Košice at 11% interest for 15 years, and 500 million crowns for two years at the same rate (three month BRIBOR plus 3%, which is about 11%). The bank would require the city to secure a promise from the state to buy 19,000 hectares of city forests for one billion crowns (the woods have an accounting value of 2.5 billion crowns).

PKB also demands Košice pay annual instalments of 165 to 185 million crowns on the debt, and requires the city to sign a contract guaranteeing that the terms of the debt restructuring will be met. The contract gives the bank an exclusive mandate for the provision of financial services, for restructuring the debt and ensuring the loan is paid. PKB also requires that at least 130% of the value of the debt in city property be turned over as collateral, and that a public notary document securing the bank's control over the entire city property be issued. The measures would give PKB an active role in preparing the city budget and in selling its property.

"The proposal is very flexible, and I told city council members that we would be constantly updating it because it's very difficult to predict the city's financial and property development over the next 15 years," added Urbančík.

The plan was 'taken under advisement' by city council September 6, with no decision issued. However, in a sign of the tensions the PKB proposal has aroused, Košice staré mesto district mayor Ján Süli said September 4 that turning over all city property to the bank to administer, and signing a contract for financial services with PKB for an unspecified sum "represents a tunnelling [asset stripping] opportunity that even the biggest crooks could only dream about."

PKB demanded Süli apologise, reminding him that PKB's majority shareholder, the French financial house Dexia, had over a century in business and financed municipal projects all over the world. "Talk of tunnelling is absolute nonsense," he said. The PKB head office added that if Süli did not retract his statements the bank might lay charges.

No choice

Košice Mayor Zdenko Trebuľa said that no other foreign or domestic bank had been willing to help Košice.

"We have no option," explained Trebuľa's deputy, Boris Farkašovský. The deputy mayor said he was particularly happy with the proposed 500 million crown medium-term credit, which would mean the city didn't have to sell off its property at firesale prices immediately to meet its debts, but could take the two-year loan term to prepare for the sales and get reasonable prices.

PKB is in fact to be the arranger of the 1.2 billion crowns syndicated loan, in which PKB would contribute 600 million crowns, Dexia 200 million, Kommunalkredit Austria AG 200 million and recently privatised Slovak house VÚB 200 million.

"The goal of the loan restructuring project is to rework existing bank liablities into longer-term loans, to lower current interest levels by at least five points, to change foreign currency loans into Slovak currency, to lower the cost of debt servicing, to rationalise the use of resources made by the town, to sell economically ineffective property, and to increase the credibility of Košice," said PKB Vice-President, Germout Baumann.

"This deal sounds like a pretty good one for Košice, in that by giving PKB control over every crown that comes in and out of the city budget it will both prevent corruption and increase fiscal discipline," said Tomáš Kmeť, an analyst at Slovenská sporiteľňa bank in Bratislava. "Cross default would be a very nasty business for the city, and creditors clearly have to be very careful. Košice simply has no other way of dealing with its financial problems."

Košice ended the first half of this year 18.2 million crowns in the black on income of 635.4 million crowns and expenditures of 617.2 million. These figures represented 26.8% of the income targets of the Košice full-year 2001 budget and 26% of expenditures. The budget was approved balanced at 1.77 billion crowns, and was since amended to its current balanced targets of 2.37 billion Sk. The half-year results do not include 200 million crowns income from sale of the city's incinerator and one billion crowns in planned income from the sale of city forests.

As for the suggestion that city councillors work for free, council member Andrej Adam of the socialist Democratic Left Party (SDĽ) said: "The amount the town would save [three million crowns annually] is absolutely insignificant. I'd like to ask the bank, though, if its 11% annual interest isn't sufficient - if the town really has to pay PKB for financial advice, and to conform to such non-standard conditions."

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