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Czech Republic: Economy Worsens As GDP Continues To Drop

Prague, 17 December 1998 (RFE/RL) -- The Czech Republic's economic difficulties, which began some 20 months ago, are worsening. The Czech Statistical Office reported this week that during the third quarter of this year gross domestic product shrank by 2.9 percent and that for the first nine months of the year, GDP dropped by 2.1 percent compared with the same periods last year.

In the words of Prime Minister Milos Zeman, "we are falling into an abyss." He blames the policies of the two previous governments of Vaclav Klaus and Josef Tosovsky. Zeman dismisses Klaus' much touted privatization as "fiction" and says virtually no real privatization has occurred. He told the pro-government daily Pravo yesterday his cabinet needs nine months of calm without criticism to enable it to start turning the economy around.

Klaus, who is now speaker of the lower house of parliament, says the decline in GDP only confirms just how dramatic the Czech situation is and the importance of finding a way out. Klaus blames restrictive central bank policies for the decline. Tosovsky is head of the central bank.

Central bank spokesman Martin Svehla concedes that the drop in GDP is worse than expected and predicts a further decline.

Zeman, Klaus, Tosovsky and trade union leader Richard Falbr met last Friday in a bid to find a mutually acceptable solution to the country's growing economic crisis. All but Tosovsky agreed on the need for economic growth to be the top priority. Tosovsky said he still viewed the continuation and completion of economic transformation as the main priority. He argued that without this condition being met, growth, if any, can only be short-term, and "will soon run out of breath". He said the revival of economic growth requires "cultivating the market environment". Tosovsky rejected any urgent need to review current economic priorities.

Zeman says any measures must involve changes that go "far deeper than mere financial support". This week he reiterated that his government plans to privatize the state's share in banks within two years, starting off by taking over certain bad loans.

Czech firms currently owe Czech banks and each other some $6.333 billion. Most of this debt is owed by Czech industry ($3.790 billion).

There are many reasons for the huge debts. In the early post-Communist years, banks remained in state hands with minimal changes of personnel at the top. They issued loans to inexperienced entrepreneurs -- largely managers at state-owned firms and former bureaucrats, enabling them to purchase these firms and other properties such as real estate.

Critics call this practice "crony capitalism" since prospective borrowers who were outside of the former Communist nomenklatura had considerably poorer chances of getting a loan while "insiders" were routinely lent large sums with inadequate controls. In many cases these borrowers took out several loans from different banks on the same collateral or else quickly resold the properties without having paid for them and without repaying the loans.

Inadequate legislation has enabled debtors who elsewhere would have long ago declared bankruptcy to remain commercially active by merely transferring their funds to newly founded independent subsidiaries. Private debtors rescue their holdings by transferring their savings, homes, and other properties to a spouse or others.

One Austrian financial analyst in Prague, Guenther Faschang of Die Erste Bank, told Lidove Noviny this week that about 30 percent of all outstanding loans in the Czech Republic are unrecoverable. In his words, "Prague has practically no other way of getting out of the problem other than through privatization". He says the Czech state just does not have enough money to help the banks out on its own.

The two banks who have extended the most bad loans, Komercni Banka and Ceska Sporitelna (CS), the country's largest savings bank, experienced losses during the first half of this year totaling $550 million.

The news weekly Respekt reports that one third of CS's $6 billion debt will be difficult to recover and an additional $1 billion in debt is practically unrecoverable.

The head of Zivnostenska Banka, Jiri Kunert, told Respekt that, in his words, "every bank that lent to the new owner of a firm ... must have known that these people had to "tunnel" the firm. That is, sell off or transfer its assets to pay back the loan, or else default. He said the problem of all semi-state banks is that they granted huge loans to people privatizing Czech enterprises without first demanding an evaluation of the firms in question.