The Slovak parliament ruled on February 13 that the country's four biggest financial institutions - Slovenská sporiteľňa (SLSP), Slovenská poisťovňa (SP), Všeobecná úverová banka (VÚB) and Investičná and rozvojová banka (IRB) - must not be privatized before the end of 2003. Although the decision is expected to cause political tremors (see story this page), economic experts on both sides seem to agree that deputies chose the lesser evil among available options.
"History is full of examples of how irresponsible and harmful the state's interference in the banking sector can be," said Brigita Schmögnerová, an economic specialist for the Party of the Democratic Left (SDL). "But if we compare [continued] state ownership to splitting the financial institutions among political parties or among enterprises who want to exploit them, we have to choose the lesser of these evils, which is keeping the banks in state hands."
Prime Minister Vladimír Mečiar's former economic advisor Peter Staněk's wants to split the banks' ownership evenly among three major entities, the state being one of them. "The [second] group should represent foreign capital up to 30 percent," Staněk said. "Another thirty percent I would give to industrial enterprises, but not to the ones who are these banks' debtors. Together they should create a financial-industrial consortium similar to those in Western countries."
Staněk's vision runs into trouble because all of the country's major industrial companies are indebted to at least one of the four major banks, Schmögnerová countered. "Every single company that could come into consideration is indebted at least to VÚB and IRB," the SDL's deputy said. "Furthermore, [these companies] don't hide the fact that they want to penetrate those banks in order to finance their often risky operations. [The east Slovak iron mill] VSŽ president [Jan] Smerek's statement that he needs [the IRB] to penetrate Yugoslavia's markets is well known."
If the industrial giants succeed, Schmognerová continued, they would endanger the banks by twisting their loan policies according to specific company needs and worsening the banks' already bad loan portfolios.
Bad loans
Bad loans in Slovakia's banking sector amount to over 110 billion Sk, or 32.8 percent of overall bank loans, according to figures provided by the National Bank of Slovakia's (NBS) bank supervision department. The big three, VÚB, IRB and SLSP, hold 78.6 billion Sk, the supervision department added.
Contrary to popular belief, Stanek said, most of these bad loans came after 1990. "Who told the banks' managements to provide bad loans worth 67 billion Sk after 1990?" Staněk asked, getting agitated. Then, directing his anger at the banks, he said: "You yourself must bear responsibility for that, because it was your management who was corrupt, it was your management who provided loans in situations when it must have been known that they couldn't be recovered."
These faulty loan portfolios played a major part in parliament's drive to postpone the banks' privatization. "After [the banks'] portfolios are cured, we will be able to sell their shares for a much higher price than today," Schmognerová said.
Ľudov't Černák, a deputy from the opposition party Democratic Union, seconded Schmognerová's opinion, adding that the banks can structure their balance sheets to boast assets they will never be able to collect. "[The banks'] results are often only on paper, because they charge their clients interest penalties [on loans] they know the clients will never be able to pay," he said.
Don't gouge the Cyclops
The lack of information about how the banks are really doing has caused one coalition leader to call for a thorough inspection of the three banks and Slovenska Poistovna. "We want the citizens to know who and why provided non-recoverable loans that cheated the state out of billions of crowns," said Jan Ľupták, the head of the Association of Slovak Workers, one of three parties in the ruling coalition.
Schmognerová pointed out that privatizing the four giants when not all is known about them would create a danger on the mythological scale of gouging a Cyclop's single eye. "If the cabinet decides to take this route, it could create a situation similar to that in the Czech Republic, where 11 commercial banks already have gone bankrupt," Schmognerová said.
That danger could lead to chaos due to how much these financial institutions control. "We are talking about our biggest financial institutions here," Schmognerova said. "Altogether, they represent about 350 billion of assets."
Staněk also sees the banks' size as a major problem, especially as far as VÚB and SLSP are concerned. "First, we have to create a strong competitive environment for VÚB and SLSP," he said. "Their monopolistic position is so strong that unless we eliminate it, we are running the risk that... their new owners will control the whole banking sector."
And not only that, Staněk added. "Both the OECD and the EU demand that we consistently exercise the right of lien to a debtor's property as a prerequisite for our accession to these institutions," he said. "And through exercising this right, they would control about 70 percent of the economy."
POSS ADDS
The other two options caused economists rubbing their foreheads. The first, which seemed to have taken a page out of a communist-style economy textbook, was seriously considered prior to coalition crisis last summer, but was turned down after the ZRS declined to take part.
The second option, though, is still alive. Brought about by Premier Mečiar a year ago, the gist of the strategy is that the banking giants would be swallowed by country's industrial titans in an attempt to follow the Japanese model from after the World War II.
Schmognerová agreed, saying: "Especially the VÚB is overcollateralized." "That would mean that the whole privatization process since 1991 until now didn't matter at all," Staněk concluded.
