Czechoslovakia: it will take 6 years to dig out from capitalism

Louis Proyect lnp3 at
Tue Jan 16 11:33:17 MST 2001

NY Times, January 16, 2001

The Yoke of Capitalism


PRAGUE - Eleven years ago, the Velvet Revolution brought Communism to an
end in the Czech Republic. The way Kamil Ziegler figures, it will take
another six years to dig out from the excesses of capitalism.

Mr. Ziegler is the departing chairman of this country's biggest and
fastest-growing financial institution: Konsolidacni Banka, the government-
owned bailout agency. Thanks to an ambitious effort to clean up and sell
off the country's bankrupt state-owned banks, Konsolidacni and various
affiliates are sitting on a mountain of $8.62 billion in nearly worthless

The assets here include more than $200 million that one bank lent to an
Austrian investment firm that turned out to be a Ponzi scheme. They include
millions of dollars squandered at Zetor, which sold tractors at below cost
to a distributor who was also the company's biggest shareholder. And they
will soon include more than $1 billion in bad loans from a bank that was
raided and seized last June by government antiterrorist squads.

Very little of this stems from the Communist era. Most flows from the
mistakes made in the first heady wave of Czech capitalism, when Czech
leaders portrayed themselves as devout believers in free markets and chided
Western European governments for being rigid and bureaucratic. State-owned
banks lent freely to well-connected industrial companies, only to discover
years later that about half their money had been wasted.

Today, almost all the big Czech banks have been taken over by foreign
institutions, from Erste Bank of Austria to GE Capital. But the mess the
Czech banks left behind remains in Czech hands - specifically, on the books
of Konsolidacni Banka - and nobody at the bank or in the government is
quite sure what to do about it. Indeed, foreign bankers complain that the
government is undermining the fiscal SWAT team it recently created to save
or dispose of the most troubled companies. Konsolidacni is now the biggest
creditor and often a major shareholder in some of the Czech Republic's
largest conglomerates. Beyond that, it holds thousands of smaller loans on
hotels, restaurants, office buildings and even car- repair shops. Its
portfolio of debris has more than doubled the last two years, to about
one-quarter of the Czech Republic's gross domestic product. And the numbers
are expected to swell by an additional $2 billion, to $10 billion, in the
next few months, as the Czech government sells the last of its big banks.

"Our mission is simple," said Mr. Ziegler, who has run Konsolidacni Banka
for two years and plans to leave next month for a senior job at an Austrian
bank in Prague. "We want to destroy ourselves as quickly as possible. We
want to dispose of our assets in the shortest time possible, minimizing the
cost to taxpayers. The job should be done in six to eight years."

But running Konsolidacni Banka is like trying to sell off a pile of rubble
even as the dump trucks keep coming. Compounding the problem, many of the
biggest debtors are also among the country's biggest employers, making it
politically difficult to force much-needed restructuring.

Selling the loans to outside investors has been painfully slow. That is
because the agency's antiquated information systems make it hard for
investors to know what is actually available and because the government is
reluctant to sell its loans at a tiny fraction of their nominal value,
which is all the market will bear.

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Louis Proyect
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