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RAISING BASIC CAPITAL AT THREE FINANCIAL HOUSES FIRST STEP TOWARDS BANK SALES

State plunges into bank restructuring

The Finance Ministry's much anticipated blueprint to revive the state's troubled banks was put into effect last week. By raising the basic capital at three of the country's largest financial institutions on December 6, 7 and 8, the state began a process of financial sector recovery that should ultimately end in the sale of Slovakia's largest banks in 2000 and 2001.
The three major state-owned banks - Všeobecná Úverová Banka (VÚB), Investičná a Rozvojová Banka (IRB) and Slovenská Sporiteľňa (SLSP) - are plagued by non-performing loans, insufficient reserves and no liquidity. Unable to fulfil their credit function, the cash-strapped banks have virtually frozen money flows in the country and have choked off credit from the corporate sector.


The government's bank restructuring plan began with a process that is drawn above. Step 1 involved a state guarantee of 17.8 billion crowns ($418.8 million) given to the National Bank of Slovakia (NBS), which allowed the national bank to tap into its reserves and return to the state 17.8 billion crowns in working capital (step 2). With this money, the state injected 8.9 billion crowns into VÚB, 4.3 billion crowns into SLSP and 2 billion crowns to insurer Slovenska Poistovna (step 3). A portion of the amounts given to each institution will be passed on to IRB (step 4). Then, the majority of each bank's bad loans will be turned over to Konsolidačná Banka, a state-owned bank designed specifically to deal with defaulted loans, or a specially-created agency known as Slovenská Konsolidačna (step 5). The final leg in the process will involve IRB giving the NBS 7.8 billion crowns in repayment of its debt, thus meeting the requirements to have the NBS-imposed caretaker administration lifted by December 20 (step 6).

The Finance Ministry's much anticipated blueprint to revive the state's troubled banks was put into effect last week. By raising the basic capital at three of the country's largest financial institutions on December 6, 7 and 8, the state began a process of financial sector recovery that should ultimately end in the sale of Slovakia's largest banks in 2000 and 2001.

The three major state-owned banks - Všeobecná Úverová Banka (VÚB), Investičná a Rozvojová Banka (IRB) and Slovenská Sporiteľňa (SLSP) - are plagued by non-performing loans, insufficient reserves and no liquidity. Unable to fulfil their credit function, the cash-strapped banks have virtually frozen money flows in the country and have choked off credit from the corporate sector.

However, a special shareholders meeting (EGM) at insurer Slovenská Poisťovná on December 6, another EGM at Sporiteľňa the following day and a final shareholder meeting at VÚB on Wednesday raised the basic capital of each institution, which will now permit the two latter banks to meet the 8% capital adequacy ratio (an amount of money, expressed as a percentage of loans given by the banks, that they keep in reserve) demanded by the central bank. Currently, the big three state banks have barely a 1% capital adequacy ratio.

The capital increases also allowed the three institutions to lend money to IRB, which the latter was to use to repay a 7.8 billion crown debt it owed to the central bank (see chart, page 2). Once the money is repaid, IRB will be in position to get rid of the central bank caretaker administration it has been under since December, 1997.

Many banking sector professionals said the importance of last week's EGMs could not be underestimated. "This is the first time the state has increased the basic capital of these institutions since 1994," said Martin Barto, head of strategy at SLSP. "It's a major leap forward."

Matthew Vogel, a senior economist for emerging markets with Merrill Lynch in London, also expressed enthusiasm for the move, calling it a big accomplishment and just one aspect of a comprehensive effort by the government to reform the economy.

"I think the plan that they've put together is very coherent and they're taking a very good course of action," said Vogel. "A lot of things are starting to happen. It's very encouraging and positive news in my opinion."

Down to the wire

Although the government officially approved its bank restructuring concept at the end of August, it took the December 20 deadline for repaying the IRB's debts to the central bank to finally goad the Finance Ministry into action.

Ján Tóth, a senior economist with Dutch investment bank ING Barings, said that although the cabinet could have acted sooner and saved the state significant sums in debt servicing costs, its strategy was at least sound.

"I think in general the government is following the World Bank's advice," he said. "It's a good thing that they're listening, because there are not enough professionally educated people here that know about this type of problem."

Tóth also said that the World Bank programme, which proposes that all three state banks eventually carve out 80% of their bad loans and deposit them in a specially-created agency and a financial clearing house, was standard procedure for dealing with bad loans.

But however tried and tested the method, the government will still be taking on a huge debt burden - estimates range between 89 and 96 billion crowns - as a result of bank restructuring.

"Because the government gave a guarantee for the bad loans [of the three state banks], the [17.8 billion crowns in] reserves created in the central bank against loan defaults will now be transferred to the troubled banks," said Tóth. "This means that the government will have to foot the bill each year, at least on the interest on these bad loans," he explained, adding that at a 10% interest rate, the operation would cost the government about two billion crowns annually ($47.6 million).

The government is also contemplating borrowing a substantial amount, up to $400 million by the year 2002, from the World Bank to help fund the plan. In addition, the cabinet may issue another 10 billion crowns ($238 million) in state bonds in the year 2000.

"The good news is that before this process begins, the amount of debt that Slovakia has is below 30% of GDP, which, by international standards, is very low," Tóth said.

To balance the growing debt, the government expects some money from the sale of the banks, but this amount will not be known until the time of purchase.

"Even Jeffery Sachs, one of the most famous economists in the world, wouldn't be able to say how much the sales will bring to the state treasury," said NBS spokesman Ján Onda.

The government's official timetable for the full privatisation of VÚB, IRB and SLSP - the end of the year 2000 - has also been doubted by analysts.

Citing problems that had occurred with a similar bank privatisation process in the Czech Republic, Vogel said he believed the Slovak sales would take more time than the government was predicting. Tóth, noting the speed at which the government had worked on other major projects (such as Slovak Telecom and IRB), also didn't expect full privatisation to occur until mid 2001.

Onda, for his part, saw the date of sale as impossible to predict. "Nobody knows how long it will take, it's a big undertaking and only just got started," he said.

Once finsihed, the restructuring will have completely revamped the three state-owned banks, which currently represent nearly 50% of the total assets and approximately 64% of the total loans in the Slovak banking market. The non-performing loans of the three banks total between 90 and 100 billion crowns, by far the major portion of the over 130 billion crowns in bad loans held by the entire Slovak banking sector.

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