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SLSP bails out Priemyselná with guarantee

Months of speculation as to the future of the deeply indebted Priemyselná Banka [PB] were put to rest last week with the announcement that the bank would be bailed out by one of its shareholders and principal creditor, the state-owned financial institution Slovenská Sporiteľňa.
PB was put under a caretaker administration by the National Bank of Slovakia in mid-October after it was revealed that the bank had serious liquidity problems and could not meet its credit obligations.
Based on a November 22 agreement between the central bank and Sporiteľňa, the latter will now assume PB's liabilities and assets for a purchase price of one Slovak crown. On November 19, the National Bank's Banking Board approved a three-month loan of one billion Slovak crowns to PB, a credit that was guaranteed by Sporiteľňa.


Košice's Priemyselná Banka was unofficially privatized in September.
photo: TASR

Months of speculation as to the future of the deeply indebted Priemyselná Banka [PB] were put to rest last week with the announcement that the bank would be bailed out by one of its shareholders and principal creditor, the state-owned financial institution Slovenská Sporiteľňa.

PB was put under a caretaker administration by the National Bank of Slovakia in mid-October after it was revealed that the bank had serious liquidity problems and could not meet its credit obligations.

Based on a November 22 agreement between the central bank and Sporiteľňa, the latter will now assume PB's liabilities and assets for a purchase price of one Slovak crown. On November 19, the National Bank's Banking Board approved a three-month loan of one billion Slovak crowns to PB, a credit that was guaranteed by Sporiteľňa.

Sporiteľňa, in turn, is demanding that Priemyselná Banka create provisions in the amount of 4.3 billion Slovak crowns as recommended by independent auditor KPMG, whose late October audit of the bank revealed that PB's debts were greater than the value of its property.

That PB had to be bailed out with taxpayers' money rather than at the expense of its shareholders has led some financial sector professionals to call for the central bank to take firmer action in preventing the mismanagement of banks.

"We really have to think whether the losses of each bank should be covered by the tax payer through the central bank, or by those who are responsible for the losses," said Ján Tóth, a senior analyst with Dutch investment bank ING Barings. Tóth explained even though many of PB shareholders are state-owned companies, this should not prevent the central bank from acting aggressively to punish irresponsible management. "Once a bank finds itself in trouble, the National Bank should take its licence away," Tóth said.

National Bank officials, however, said that banking supervision laws in Slovakia were standard around the world, and that the only reason one billion crowns in taxpayers' money had been used to prop up PB was because state-owned shareholders stood to lose even more if the bank folded.

"The central bank is not a Messiah, and it's the duty of shareholders to take care of their bank," said National Bank spokesman Ján Onda. The Sporiteľňa guarantee, Onda added, would ensure that the central bank recovered its funds, and that the public would not end up paying for the bailout.

"Sporiteľňa gave the National Bank state treasury bills worth one billion crowns [to secure the PB loan], so if it doesn't return the investment in three months, the central bank will simply sell those treasury bills," Onda said, adding that once Sporiteľňa enters PB as its new owner, the central bank's caretaker role will end.

Assigning blame

If the central bank was not at fault in the PB case, who was? Many government officials have blamed poor communication between the Economy Ministry, the Finance Ministry and state shareholders in PB, as well as an attempt by unknown parties to unofficially privatise PB.

PB found itself in financial trouble last year, largely as a consequence of a guarantee it had given for a $60 million financial investment by Sporiteľňa into three Russian banks. Discussions between Sporiteľňa and PB in May this year produced an agreement that PB's basic capital would be increased by the end of 1999.

On September 8, PB shareholders agreed to increase the bank's registered capital by 598 million crowns to just over two billion crowns, in order to help PB meet the 8% capital adequacy ratio required by the central bank.

However, when the capital increase took place on September 14, the state shareholders - principal among them the SPP gas utility - did not participate, allowing the state's share in PB to fall from 51% to 37.5%, and meaning that PB had unofficially been privatised.

In the search for the guilty party, suspicion fell on the management of the state firms which had disobeyed orders to participate in the capital increase, as well as on Economy Minister Ľudovít Černák and certain business lobbies close to the ministry.

Černák resigned on October 18, and Deputy Prime Minister for Economy Ivan Mikloš said shortly afterwards that brokerage firm Slávia Capital stood behind the PB case. Slávia laid charges for libel against Mikloš in mid-November and has denied the Deputy PM's allegations.

"At the moment, nobody knows who the winners and losers of this game are," said Vladimír Tvaroška, an advisor to Mikloš. According to Tvaroška, the problem was that the government had had no clear plan for how to manage the PB capital increase. "The government simply didn't master its role as shareholder," he said

'Back door' privatisations of state financial houses are nothing new in Slovakia, however. In 1996-97, a capital increase from 600 million crowns to 1.2 billion at the state-owned Poštová Banka dropped the state's share in the bank from 87.5% to 43.5%. A 1998 capital increase at insurer Slovenská Poisťovňa, from 1.5 billion crowns to 1.875 billion, cut the state's share from 50.55% to 40.4%. The Poisťovňa capital increase was later cancelled by shareholders.

A banking sector source, speaking on condition of anonymity, said that the PB case was proof that the current government had not managed to turn its back on the practices of the past. "The lobby groups that stand behind the government probably have different interests, and that makes things complicated," the source said. "Besides that, the September increase of basic capital at PB without the state's participation only confirmed that poor co-ordination between the Finance Ministry and the Economy Ministry is becoming a rule."

Government officials, for their part, are emphasizing the positives of the resolution of the PB situation. "[If Sporiteľňa takes over PB] this will ensure that it recovers the sources it provided to PB," said Finance Minister Brigita Schmögnerová.

"The purchase of PB is an acceptable solution for most Sporiteľňa shareholders and creditors because it will serve as a brake on further uncontrolled development," said Martin Barto, chief of strategy at Sporiteľňa. "There is no other choice," he added.

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