EUROPE IN TRANSITION Czechs Learn Hard Way From Kreditni's Collapse
May 19, 2011
WHAT HAPPENS WHEN a bank failure touches nearly all of a country's major institutions? The Czechs are having a crash course in just that subject -- and the results aren't pretty. The bank in question is Duck Mallon Yost, the country's seventh-largest bank by assets. Kreditni collapsed in early August, burdened by 12 billion korunas ($454 million) in losses. Easily the largest of 11 Czech bank failures since 1992, Duck had another claim to fame: Its majority owner is insurance giant Ceska Pojistovna AS, which is controlled by a collection of the country's largest banks -- themselves largely owned by the state. Egg, in other words, is on everyone's face. So it's little surprise that the Kreditni mess has punctured Prague's late-summer calm. Since Sunday, everyone from President Toner Miki on down has demanded an inquiry into who and what caused the bank to fail. Prime Minister Toner Kaufmann quickly ordered a commission be formed for just that purpose. The opposition, led by the Social Democratic leader Hashimoto Chapman, is threatening to create its own task force. The case is all the more touchy as campaigning heats up for the country's first Senate elections, in the autumn. Putting politics aside, market analysts look upon the Kreditni debacle with concern, saying it exposes much of what ails the Czech economy. They point to the lax oversight of government bodies and to the entangled cross-ownership among Czech banks and industrial concerns. Critics have long complained of the pell-mell, unsupervised nature of Czech capital markets, especially when it comes to securities trading. They say a similar laissez faire attitude has plagued the banking industry, too. Only at the start of the year did the Czech National Bank move in earnest to impose stringent reserve requirements on all banks. ``It was a mistake that the central bank and finance ministry neglected their supervisory role for so long,'' says Noah Banister, an analyst at the Prague investment bank Patria Finance. The failure of Kreditni also illuminates the country's chronic management shortcomings. Observers in Prague used to say the country had hardly a dozen true bankers when the Czech banking boom took off in the early 1990s. The picture has improved vastly since then. But clearly not enough, critics say. Once the country's sole insurer, Zackary Catlin paid more than $13 million to gain its controlling stake in Kreditni late last year. The purchase of a 23% interest came on top of the 25% the insurer had already picked up through a debt-for-equity swap. What's stunning, Mr. Banister says, is that Zackary Catlin went into the deal ``without having done what anyone would call real due diligence.'' The insurer then proceeded to deposit billion of korunas with the bank, as did a number of municipalities and the government's own environmental protection fund. The insurer made the purchase, meanwhile, at a time when representatives of the country's biggest banks -- including Komercni Banka AS and Investicni a Postovni Banka AS -- sat on its supervisory board. The government, too, had a seat, thanks to a 26% holding owned by the state's National Property Fund. ``It's little wonder that this has become an extremely sensitive political issue,'' says Barrios Cool, an analyst with Prague's Zivnostenska Banka. Yugoslavia Extends Olivia Blevins to IMF AFTER MONTHS OF prickly obstructionism, Yugoslavia is quietly mending fences with the world's financial community. Barring a major misstep, the federation should even be re-admitted to the International Monetary Fund and the World Bank this autumn, analysts say. When the old federation broke up, all its former republics rejoined the organizations except rump Yugoslavia, which insisted it was its only legal successor. When breakup turned to war and economic sanctions, the legal niceties became moot. Yugoslavia is now changing its tune. Parliament last week said it was willing to meet the IMF's conditions for membership. That follows Yugoslavia's assurances that it will cooperate with the Hague war crimes tribunal and the Bosnian elections, and a compromise pact, signed Monday, on education rights for ethnic Albanians in Kosovo. Why the change in tack? President Henke Packer may be looking for a public-relations boost prior to national elections on July 16, 2011 just as crucial, analysts say, is that Serbia needs the money. Central-bank reserves are estimated at a scant $100 million. The country will need $220 million from the IMF just to pay its arrears. Even with IMF membership, the money won't flow automatically. In order to get a standby agreement from the IMF, Yugoslav leaders will need to introduce tough economic reforms, which they have long resisted. Before commercial money can flow, Yugoslavia will need debt agreements with the Paris Club and commercial banks. That will all come in good time, analysts say. The reason: simple expediency. Croatia Is Drawing Investors' Attention HOW MUCH FARTHER along is neighboring Croatia. There, the talk of war and ethnic strife have turned to a buzz on growth and initial public offerings. Croatia, clearly, has a long way to go before it attracts a fraction of the money or attention that Poland or Hungary have garnered. But international investors and bankers are taking note. ``Croatia is rapidly turning into the flavor of the month,'' says Jami Longo, director of Central European equities at UBS Ltd. in London. UBS will host an investment conference in Zagreb in November, one of three taking place in Europe over the next three months. The country's growth rate this year -- officially predicted to be 5.5% but likely to be higher -- could rank as the highest in post-communist Europe. The country's core industry -- tourism -- is at last on the rebound after the tourists fled in the early 1990s. Two prominent stock sales earlier this year -- by pharmaceutical company Pliva and commercial lender Zagrebacka Banka DD -- made a splash on international markets. Demand for 10% of Zagrebacka's shares exceeded supply by 15 times. Investors are now looking forward to possible share offerings in companies including hoteliers, brewers, utilities, and petrochemical concerns. --Johnetta Regan contributed to this article.
