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Czech Republic: Largest Bank Entangled In Scandal

In the Czech Republic's biggest banking scandal since the fall of communism, police this week charged 11 top managers of the country's largest commercial bank with mismanagement of entrusted property and violation of their duties. RFE/RL correspondent Jeremy Bransten looks into the recent history of Komercni Banka.

Prague, 12 May 2000 (RFE/RL) -- An investigation in December confirmed that Komercni Banka made an unsecured loan of more than $175 million (7 billion Kc) to the Austrian commodities-trading company BCL. The Austrian company has since gone bankrupt.

The BCL loan was the state-run bank's largest default, but it was by no means the only one. Since the early 1990s, when Komercni Banka became the government-designated motor of Czech privatization, the bank made scores of unsecured loans to various businesses. Many were never repaid. Recent audits have shown that even when loans were supposedly secured, the real estate, industrial plants, and other collateral the bank counted on was highly overvalued.

The current Czech government now wants to privatize Komercni. So far, it has spent some $1.5 billion of taxpayer money to cover the debts resulting from the bank's bad loans.

Komercni's problems are not unique in the Czech Republic. Rather, say analysts, they are symptomatic of the murky relationship that links the government, banks, investment funds, and many Czech companies. That relationship emerged in the early days of privatization, when Vaclav Klaus -- an economist by training -- was prime minister.

Under Klaus, state banks ended up with key shares in many privatized companies and were encouraged to keep those companies afloat with soft or unsecured loans. Hana Lesenarova, a journalist with the "Prague Business Journal," told RFE/RL that Komercni Banka, as the country's largest bank, played an especially important role in this scheme:

"There were phone calls made and political pressure made, and Komercni was clearly on the top of the list in terms of financing the privatization of Czech industry. And that's something obviously that was Klaus's vision. So the banks were here to serve Klaus's vision of bank-led privatization, and we're now actually paying for it."

Lesenarova says that during the 1990s, government pressure on Komercni to provide loss-making loans to domestic enterprises drove the bank to seek risky deals abroad, in the hope of making a quick profit. That is how the bank became involved with BCL -- a little-known commodities operation run by an Israeli family out of Vienna.

The charges filed this week against Komercni's managers relate only to the BCL case and do not directly call into question Czech government privatization practices. Still, Lesenarova says the case represents a watershed. But she adds that most people in Prague -- who judge by past practice -- remain skeptical that the trial will end in convictions:

"Actually, the Czech National Bank itself has filed charges [against 16 smaller banks] in the past. But as far as they've announced, no one has actually been sentenced for anything."

For a few years in the early 1990s, Czech privatization looked to be a miracle cure -- with almost no bankruptcies and very low unemployment. Now the bill has come due. Unemployment has shot up, as have bankruptcies. And the Czech taxpayer is footing the bill for the huge debts run up by state banks.

The handling of the case against the Komercni Banka managers will serve as a signal to the financial community both at home and abroad whether the lax practices of the past belong to Czech history or will continue in the future.