Ministers aim to learn from Czech lesson

Date: 03/07/1997

By Tim Jones

WHEN finance ministers of the eastern applicants for EU membership troop into Brussels' Justus Lipsius building next week, they will have as much to learn from each other as from their western mentors.

In the first bout of 'structured dialogue' under the Luxembourg presidency of the Union, EU and central and eastern European (CEEC) finance ministers will devote themselves on Monday (7 July) to the accidentally apposite issues of banking supervision and capital market reform.

Eastern Europe has had a difficult time in this sector over the past year. The Organisation for Economic Cooperation and Development has worried openly about the viability of many Slovak banks, while the Bulgarian system approached collapse and an Albanian investment crisis led to a civil war.

But it is the fall-out from the banking crisis in the Czech Republic which will give this otherwise dull but worthy discussion an edge. “This debate was planned about two years ago,” said a Czech diplomat. “Believe it or not, it had nothing to do with recent events.”

Nevertheless, the two hours set aside by Luxembourg Prime Minister Jean-Claude Juncker for talks on capital market liberalisation and banking sector reform should attract more than usual interest from his colleagues.

EU finance ministers have not been known for their interest in CEEC issues and Juncker's choice of timetable - running the debate from midday and into lunch - implies that he wants to keep his audience captive.

When this issue was last discussed two years ago, it was the first of the new highly structured dialogues set up by short-term French Finance Minister Alain Madelin.

To prevent endless rambling speeches and no conclusions, keynote speakers were chosen from the applicant states and a threesome from the Union side.

This time, all eyes will be set on the Czech Republic's new Finance Minister Ivan Pilip, who has only just been selected to replace the ill-fated Ivan Kocarnik under a major reshuffle to save the administration of Vaclav Klaus, laid low by the most serious banking collapse in central Europe.

“Pilip could tell everyone a lot about how an experiment in truly laissez-faire economics went terribly wrong,” said an EU official. “Everyone among the EU ministers will be interested in what he has to say and some will be dying to give their medical advice.”

The crisis in the Czech Republic began last summer when Kreditni Banka collapsed, followed within a couple of months by AB Banka and Ceska Banka.

By late last year, six banks had been forced into public administration, four had been liquidated and two were formally declared bankrupt.

Most worryingly of all for the threat it posed of a contagious collapse of the whole financial system, polls showed that half the Czech population distrusted all banks. The low point came when the fifth largest bank in the country, Agrobanka, was taken into administration and the central bank acted to guarantee all deposits.

The capital markets generally were mismanaged, or not managed at all. Several firms were bought by asset-strippers and profits were spirited out of the country. In the worst scandal, 40 million ecu was embezzled from investment fund CS Fondy and deposited in banks abroad.

Added to this was a crisis in the currency itself. The once-praised Czech boom had been fuelled by consumption of foreign products, turning a trade surplus turned into a deficit worth 8&percent; of gross domestic product. The koruna collapsed and the central bank was forced to spend more than 2 billion ecu shoring up the currency.

In April this year, Prime Minister Vaclav Klaus was obliged to propose the kind of 'protectionist' measures for controlling volatile capital movements which would once have been anathema to him.

For the first time, the finance ministry has actually been on the look-out for advice from the London and New York stock exchanges on how to supervise the markets, while the government is talking about setting up an all-powerful independent market watchdog.

UK Finance Minister Gordon Brown will be keen to promote his recently announced policy of throwing all supervision (banking, insurance and securities) into one exchange commission.

Polish Finance Minister Marek Belka will have a better tale to tell about his country's banking sector, one of the pioneers of reform in the region. However, he may also be quizzed on his plans to cut his budget deficit to below 2&percent; of GDP next year.

Poland's central bank is warning that a failure to go for a balanced budget in 1998 threatens to leave too much demand in the economy, so widening the trade deficit to the magic figure of 8&percent; of GDP. This was the point at which the Czech koruna began its nosedive.

EU finance ministers will give this approach their blessing since the last thing they want is any threat from the CEECs to introduce import surcharges or curbs on the movement of capital which could undermine their chances of qualifying for Union membership.