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FNM brass inherited a sinking ship

Officials at the FNM state privatisation agency revealed on January 25 that the agency was vritually bankrupt, despite having privatised assets with a book value of 109.2 billion Slovak crowns ($2.95 billion) over the last four years. Firesale prices charged for state property, lenient installment plans for buyers and the use of bonds instead of cash to settle debts owed the FNM were alleged to have caused the current cash crisis.
The FNM, or National Property Fund, said in a statement released to the media that the purchase price of the property sold between 1995 and November 1998 was only 30.7 billion Sk, or 28% of book value. Moreover, many of these sales contracts included installment calendars spreading the payment of the purchase price over periods of up to ten years, with the result that the FNM had received only 19.7 billion Sk of the agreed purchase prices by the end of 1998.

Officials at the FNM state privatisation agency revealed on January 25 that the agency was vritually bankrupt, despite having privatised assets with a book value of 109.2 billion Slovak crowns ($2.95 billion) over the last four years. Firesale prices charged for state property, lenient installment plans for buyers and the use of bonds instead of cash to settle debts owed the FNM were alleged to have caused the current cash crisis.

The FNM, or National Property Fund, said in a statement released to the media that the purchase price of the property sold between 1995 and November 1998 was only 30.7 billion Sk, or 28% of book value. Moreover, many of these sales contracts included installment calendars spreading the payment of the purchase price over periods of up to ten years, with the result that the FNM had received only 19.7 billion Sk of the agreed purchase prices by the end of 1998.

The Fund added that the last sum included 7.8 billion Sk in FNM bonds that had been used in place of cash installments, meaning that the real income from the almost 110 billion Sk worth of property privatised in this period was a mere 12 billion Sk. 11% of the real worth of the formerly public assets.

According to FNM media advisor Iveta Seiferová, the FNM found itself unable to meet its obligations at the end of 1998. The fund's debts totaled 2.45 billion Sk, while the FNM's costs for acquiring and settling loans for 1998 alone was 604 million Sk.

Seifertová said the financial problems of the FNM accelerated in 1997 when privatisers began to settle their obligations towards the FNM through FNM bonds. The situation was exacerbated by a series of repo transactions and unfavorable loans.

In recent years, repo transactions served only as a tool for solving temporarily liquidity problems. In 1997, however, the FNM's coverage of its cash deficit by repo trades gradually rose to 1.3 billion Sk, while several other repo transactions were prolonged.

By the end of 1997, consequently, the FNM had insufficient money either to settle its current debts or to begin a preliminary payout on privatisation bonds held by citizens older than 70 years of age.

Seifertová explained that although the FNM faced over 3 billion Sk in payments on these senior citizen bonds, due by December 31, 1997, it took no measures to secure the necessary funds. Instead, it enabled the biggest privatizers and owners of the most lucrative properties to make installment payments with FNM bonds rather than cash. A total of 732,881 of these bonds were redeemed in this way before December 31, 1998, which represents 7.8 billion Sk that the FNM accepted in bonds instead of liquid funds.

In early January 1998, the FNM took foreign loans worth 124 million DEM (2.4 billion Sk) in order to meet its commitment to pay out on the bonds held by elderly people. These funds were secured through a six-month exchange-bill transaction at roughly 17% interest p.a..

The Fund was unable to repay these loans in six months, however, so it carried out a 1.6 billion Sk repo trade with wealthy insurer, Slovenská Poisťovňa. During the trade, the FNM collateralized lucrative securities from its portfolio, such as its stakes in banks VÚB and Banka Slovakia, shipping company Slovenská Plavba a Prístavy, machinery giant DMD Holding and the resort Interhotel Tatry.

Concurrently with this repo transaction, an increase in the volume of share assets took place at Slovenská Poisťovňa. Although the FNM did not take part in the increase, it supported the move, which according to the fund's current representatives represented a covert attempt to privatise Slovenská Poisťovňa and gain a share of the VÚB and other state institutions through the collateralised FNM stakes.

At the end of December 1998, the FNM controlled state assets with a total nominal value of 55.2 billion Sk. However, of this figure, property worth 42.7 billion Sk lies in companies that cannot be privatized according to the law (Slovenská Poisťovňa, power producer SE and the SLSP bank). This means that all the FNM has left for sale are stakes in companies with a nominal value of approximately 12.5 billion Sk. The fund says the market value of these stakes is a fraction of this sum, moreover, because these are primarily minority stakes in companies that are either close to default or already in liquidation.

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