"The greatest danger in revitalization is that the debtors want to make arrangements that favor themselves rather than their creditors."
Ladislav Balko, Revitalization Project Director Všeobecná Úverová Banka (VÚB)
The corporate revitalization act is a measure that aims to correct the massive insolvency of some Slovak firms, estimated to have reached 220 billion Sk ($6.4 billion) and to affect more than 50 percent of companies. A central commission, composed of bankers and government ministers (see box, this page), will hear the restructuring plans of business applicants, and then select a limited number of companies for state-arranged financial aid.
The banking community is divided on the merits of the law. If the commission uses its powers to give financial gifts to politically influential firms, then state-owned banks will find themselves committed to underwriting possibly doomed business ventures. On the other hand, if applicants are judged only according to the financial soundness of their business plans, the law may allow Slovak creditors to eventually recover some of their bad debts.
Who gets helped
Some financial analysts have said that the revitalization law aims to secure voter support for the government coalition, especially in depressed areas of the country where the failure of regional large employers would be received poorly. "The law was made to buy votes," said one source who preferred to remain anonymous. "People who are employed tend to feel happy with their standard of living, and vote for the status quo."
The government's recent moves provide almost tacit confirmation of this analysis. The Finance Ministry's spokesman Jozef Mach identified several companies for The Slovak Spectator, among the more than 1,500 applicants, that are at the top of the Revitalization Commission's list for receiving financial assistance.
Singled out by Mach were shoemaker JAS Bardejov and heavy machinery manufacturers TEES Martin, ZŤS Martin and ZŤS Dubnica. Each company is a large employer in an area with high unemployment, and in grave trouble. JAS Bardejov had to release 946 employees in the first half of this year.
Juraj Renčko, an economic analyst at the Slovak Academy of Science's (SAV) Forecasting Department, for one, sees nothing wrong either in casting a lifeline to important companies or to casting around for workers' votes. "I think this is right," he said. "If they have markets and new management, they should be allowed to develop, even in this non-market way." Allowing these companies to go bankrupt, he said, would be politically dangerous.
The state banks seem to have accepted this fate. "The position of our bank towards revitalization is 'OK, let's go forward, but in the right direction, not an unrealistic one,'" said Ladislav Balko, director of the revitalization project at Všeobecná Úverová Banka (VÚB).
Balko said that such economic restructuring projects "are not new to the bank - we have already tried to revitalize industry, but we didn't have the support of the law." But he cautioned that the new state program "must be oriented towards companies that are able to reorganize" rather than debt-ridden industrial dinosaurs.
Here lies the greatest unknown about revitalization - whether it will be used only to prop up companies close to the ruling coalition. Renčko harbors grave suspicions, saying that "the revitalization law is a result of lobbies from higher powers and larger enterprises, especially the machinery industry." He also pointed out that since the committee has no oversight, there is the danger that it will use its powers to forgive the debts of companies close to the coalition.
Even if the commission does not give preferential treatment to companies owned by friends of the government, there is still another danger that its decisions could hurt banks participating in the process. "There are plenty of dangers in the revitalization process," warned Balko. "For example, the bank might be forced to take steps that it doesn't agree with, depending on how the commission votes."
Balko was worried that companies selected for financial aid must be approved by a three-fifths majority of both state and banking groups serving on the commission. With each bank anxious to help out its own debtors, and thus recover a portion of its own bad debt, compromises and even sacrifices might have to be made.
"From our point of view, it will be important to help organizations that have a classified loan with our bank, because only in this way will our reserves be used optimally," said Balko. "But if the other four banks vote against VÚB, we have no voice."
Creditors on the hook
Once accepted by the commission, companies may receive help in a bewildering array of forms - rescheduling loans or postponing their payment, writing off or reclassifying debt burdens, or rearranging corporate tax structures to provide exemptions, to name several options.
"The greatest danger in revitalization is that the debtors want to make arrangements that favor themselves rather than their creditors," observed Balko. Each project that is approved by the commission will be guaranteed with money from the five Slovak banks, whose participation is required by law. "Our bank has collateral with debtors," explained Balko. "In case revitalization doesn't succeed, what will happen with our collateral? Will it be valid?"
Ivan Mikloš, vice-chairman of the Democratic Party (DS), confirmed that the law will "certainly benefit debtors, who will not have to pay anything, but will be less attractive to creditors deprived of a chance to collect at least part of outstanding claims."
At the first meeting of the revitalization committee on August 20, 1997, Finance Minister Sergej Kozlík said the banks will contribute more than 30 billion Sk ($882 million) "to be effectively utilized through the revitalization law."
When asked about the money, Balko protested that Kozlík's figure represented all of the reserves that the Slovak bank sector had created against its bad debts. VÚB has about 17 billion Sk
($500 million) on reserve, Balko said, but needs 8 billion Sk ($235 million) more. "It is not true that all of these reserves will be used for revitalization," he stated. Kozlík's number "is his own vision."
Quibbles over exact figures aside, it is certain that the five state-owned banks will be required by the government to use the greater part of their reserves as a counterweight to possible revitalization giveaways. Mikloš argued that this mechanism contains the "ulterior motive" of the whole project, which was to "arrange for the debt of certain enterprises [the largest debtors] to be waived. The disadvantaged creditors [are] state-owned businesses where the government has enough clout to enforce such unprofitable transactions."
Kozlík announced that the first revitalization projects will be approved "at the end of September or the beginning of October." Until then, agree all sides, the law exists on paper only and cannot be adequately judged. "Only time will show if this law is a good one," Balko said.
11. Sep 1997 at 0:00 | Tom Nicholson