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Košice receives praise, loan deal for bold budget cuts

CASH-strapped Košice looked to be past the worst of its financial problems as town, government and bank officials signed a contract on May 6 to restructure the massive debt of Slovakia's second largest city.
The agreement gives the state and Prvá komunalná banka (PKB) supervision over the restructuring of Košice's Sk1.7 billion debt, and comes shortly after the town received a rating of C-plus with a positive outlook from the Slovak Rating Agency.
"With regards to the restructuring of mortgages and debt servicing, in which the government and PKB are also involved, the signing of the contract is a very positive step," said Košice deputy mayor Boris Farkašovský.


SCHUSTER, left, didn't tell Swedish royalty how much it cost.
photo: TASR

CASH-strapped Košice looked to be past the worst of its financial problems as town, government and bank officials signed a contract on May 6 to restructure the massive debt of Slovakia's second largest city.

The agreement gives the state and Prvá komunalná banka (PKB) supervision over the restructuring of Košice's Sk1.7 billion debt, and comes shortly after the town received a rating of C-plus with a positive outlook from the Slovak Rating Agency.

"With regards to the restructuring of mortgages and debt servicing, in which the government and PKB are also involved, the signing of the contract is a very positive step," said Košice deputy mayor Boris Farkašovský.

Under the terms of the deal, the state will provide 'returnable financial aid' (a soft loan) of Sk580 million, PKB will set up a restructuring mortgage worth Sk700 million, and Sk660 million will come from the sale of city property.

The debt began piling up during the 1994-1998 mayoral term of current President Rudolf Schuster, as Košice undertook a lavish reconstruction of the city centre.

During that time, the city rebuilt its main square complete with channels of running water and installed a singing fountain between its opera house and the Alžbetina cathedral, with the declared aim of putting Košice back on the tourist map.

However, Košice's financial problems came to a head last December, as creditors lost patience and the city faced a cross-default on its loans.

In an effort to stave off financial collapse, the city tried to sell Sk980 million worth of its forests to the state, but the proposal was rejected by cabinet due to fears of setting a precedent for other troubled municipalities.

Slovak Towns and Cities Association vice-chairman Milan Muška said at the time: "I think anyone who's starting a local reconstruction project in his city should first of all know how he's going to pay for it. If the management goes wrong, the town itself should carry the consequences, not the country's tax payers."

Since receiving a bailout loan from the state in January, however, the city has tried to cut spending under the guidance of PKB.

"We have cut our expenditures, reduced the number of employees, and limited different reconstruction in the town - we only did what was necessary to complete some streets," Farkašovský said.

"The caps on spending came at the expense of other things; we have invested almost nothing because there's no money for it.

"We're going to have to keep doing this until we have our debts restructured," he said.

The rating, which is valid for one year, is a sign that Košice is beginning to address its debt problem, said Tomáš Kmeť, an analyst at Slovesnká Sporiteľňa.

"The rating means that the risk of default has decreased. In the future it means the town will have a better chance to get a loan, or more success when issuing municipal bonds," said Kmeť.

However, the analyst added, "it's fair to say that investors, based on the bad example of Košice, are going to be more careful about investing into municipal bonds."

Farkašovský said he believed that while there was still much to be done in improving the city's financial viability, Košice was on its way back from the brink.

"It took a lot of courage to even ask for a rating. But we had the rating done to see how we stand - how independent observers evaluate us. From the beginning of the year we have undertaken many restrictive measures in the town, and the positive outlook in the rating is a positive result for the town and our creditors," he said.

"We are past the worst of our problems because the outside world has started to believe that we are serious about taking care of our debts."

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