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CZECH GOVERNMENT'S DEBT GUARANTEE IS GREEN LIGHT FOR BANK'S PRIVATIZATION

Slovakia's repudiation of loan leads to arbitration

Slovakia's repudiation of a 15.5 billion Sk ($400 million) communist-era debt to a large Czech bank forced the Czech Finance Ministry on April 14 to announce a guarantee for 90% of the defaulted loan. The move allowed the Czech government to continue with its planned privatization of the bank, and removed pressure on the bank's management to recover the debt. The disputed sum is currently under scrutiny at an international arbitration court in Washington, D.C.
Representatives of Československá Obchodní Banka (ČSOB) claim that if Slovakia loses its case in Washington, it will end up paying billions of crowns in accrued interest. The Slovak Finance Ministry refuses to comment on the matter altogether, reasoning that the dispute is before the court and that the Slovak cabinet is currently assessing its chances of victory.

Slovakia's repudiation of a 15.5 billion Sk ($400 million) communist-era debt to a large Czech bank forced the Czech Finance Ministry on April 14 to announce a guarantee for 90% of the defaulted loan. The move allowed the Czech government to continue with its planned privatization of the bank, and removed pressure on the bank's management to recover the debt. The disputed sum is currently under scrutiny at an international arbitration court in Washington, D.C.

Representatives of Československá Obchodní Banka (ČSOB) claim that if Slovakia loses its case in Washington, it will end up paying billions of crowns in accrued interest. The Slovak Finance Ministry refuses to comment on the matter altogether, reasoning that the dispute is before the court and that the Slovak cabinet is currently assessing its chances of victory.

Slovakia's debt to the ČSOB is only one of several large financial obligations left over from the 1993 split of Czechoslovakia, and is the first of these settlements to be tried in court. In a wider sense, the government's intransigence shows how politically charged the issue of dividing formerly mutual property remains for both sides.

Jozef Šalak, a member of the ČSOB Board of Directors, explained that the Czech government guarantee would reassure the bank's depositors and ensure that the value of its shares did not decline. "Whatever happens at the court in Washington, our clients should be very satisfied with the guarantee," he said. "But the real point is that we can go ahead with privatization, and not have to wait the two, three or five years for legal proceedings to come to an end."

"The main effect of the guarantee is psychological," agreed Ladislav Unčovský, Director of ČSOB's Bratislava branch. "Now there are no more problematic receivables, and we can focus on presenting ourselves as a stable bank which made 3.5 billion Czech crowns in profit last year. Without the guarantee, we would be in a very bad position."

In view of the Czech government's intention to begin privatizing the ČSOB in 1998, covering the bank's Slovak liabilities made sound financial sense. ČSOB's basic capital is 18 billion Sk, and its capital adequacy ratio would have been jeopardized if it had been forced to cover the entire Slovak debt by itself. "Having to cover that [whole 15.5 billion Sk] figure would have seriously affected our privatization plans," said ČSOB spokesman Milan Tománek.

One of the strongest incentives for the government guarantee, Šalak said, was that Czech governmental organizations - the National Property Fund, the Finance Ministry and the Czech National Bank - owned approximately 66% of ČSOB shares. "We think the real value of ČSOB stock is three times higher than its book value," Šalak explained. "The Czech government guaranteed the debt to keep the bank's value high, helping its own position as a ČSOB shareholder."

Troubled history

After the split of Czechoslovakia, Czech and Slovak finance ministers authorized the ČSOB in April 1993 to collect debts stemming from its communist-era foreign trade activities. After only partial success in recovering bad loans, the remainder of the accounts payable was divided between the Czech and Slovak finance ministries by a 3:1 ratio, leaving the Slovak government with a 15.5 billion Sk debt. In December 1993, both sides set up financial companies wholly owned by their respective finance ministries - Česká Inkasná (ČI) and Slovenská Inkasná (SI) - and charged them with recovering the outstanding loans.

However, after making an initial payment of 1.5 billion Sk to the ČSOB in 1994, the Slovak company informed the Czech government and the ČSOB in May 1995 that it would not be able to continue to meet its obligations.

Slovak Finance Ministry State Secretary Peter Staněk refused to discuss either SI or the ČSOB, saying that the issue was still being debated by the government. Ministry spokesman Jozef Mach initially declined to comment as well, saying the dispute was still before the court, but then explained that SI had withheld payment to the ČSOB because the Czech side "did not provide precise accounting documentation for these loans. We didn't just want to give the ČSOB a blank check."

But ČSOB officials insisted that their bank had supplied full documentation on the debt on two occasions, and pointed out that Premier Vladimír Mečiar's government had simply failed to make provisions for paying the loan in both its 1995 and 1996 state budgets.

On April 10, 1997, the ČSOB Board of Directors ran out of patience and declared the entire SI loan balance immediately due and payable. Eight days later, the bank filed an arbitration request with an international arbitration court in Washington. But given the court's ponderous dispute mechanism, only one hearing was granted within the next year, and in March 1998, the Czech Finance Ministry again lost patience and told the ČSOB to write the Slovak debt off its accounts and cover it from provisions

Velvet divorce, rough proceedings

"We as a bank, and our lawyers as well, believe that we will win the case," said Unčovský. "Our case is strong. Full and clear documentation has been supplied to the Slovak Ministry of Finance, and we expect to be able to prove this in court."

"We are expecting that the court will uphold our position," Mach shot back, but would not elaborate further.

A source at the Czech Finance Ministry, who asked not to be identified, said that the Slovak government's refusal to honor its financial obligations to the ČSOB stemmed from deeply-rooted antagonism toward the Czech Republic as a whole. "The whole SI-ČSOB dispute has its roots in the split of Czechoslovakia," the source explained, "and has been influenced by feelings left over from that time."

Šalak reported that he had been involved in negotiations with the Slovak Finance Ministry in 1996, and that even then, the political will to achieve a settlement had been lacking. "I said many times to the Slovak representative to accept another approach to solving the SI problem," he said. "I am sure I was right, and [reaching a solution in 1996] would have resulted in much lower future debts. The problem facing the Slovak part now is snowballing interest rates, because we could be waiting for a court decision for several years."

"Any kind of divorce, even a velvet one, is still a divorce," agreed Unčovský. "There are still many arguments [between the Slovak and Czech contingents], but these are now mainly between state institutions, and not between entrepreneurs," he added.

SI recently filed for bankruptcy with Slovak court authorities, and as of May 6, 1998, has been in bankruptcy proceedings. In Slovakia, companies have to sue for bankruptcy on their own initiative "if their accounts payable is higher than the [value of the] property of the company," explained Daniel Lipšic, an expert on bankruptcy law, for the SITA news agency. The ČSOB responded to the move with the statement that nothing has changed with respect to the lawsuit, since the bank hadn't sued SI, but the Slovak Republic.

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