It wasn't the usual post-communist privatization fire sale. It was more like a call to arms. When Czech Prime Minister Josef Tosovsky sold the state's 36.7% stake in Investicni a Postovni Banka (IPB) to Nomura Europe PLC for $89.2 million on Mar. 9, it amounted to war on the Republic's failing banking sector. The privatization of the state's third-largest bank--with $7.1 billion in assets--means Czechs may finally be serious about fixing the nation's finances. "We must move forward," says Tosovsky, who heads the Republic's caretaker government until elections in June.
It's a far cry from the policies of Tosovsky's predecessor. Former Premier Vaclav Klaus, for all his free-market rhetoric, refused to get tough on banks. Fearing the layoffs and subsequent social unrest that privatization would bring, he used the government's seats at state-owned banks to pressure bankers into propping up uncompetitive industries with loans. As Czech industry faltered, bad loans increased. Now, 30.6% of all loans are nonperforming. The devastating impact on economic growth, which shrank from 4.4% in 1996 to 1.4% last year, led to Klaus's ouster in December, 1997.
The incestuous relationship among the government, banks, and industry makes Czech markets a dangerous place to invest. Opaque accounting rules, murky cross-shareholding ties, and poor regulation have protected Prague's interests and stunted the growth of Czech capital markets. For example, banks have used subsidiaries to gain ownership stakes in local companies, and then loaned those companies money at rates favorable to the bank--but not to the company. Next, fund managers at the banks' investment subsidiaries would often trade shares in those companies to prop up their values. "Corporate issues are traded like poker chips," says former Prague Stock Exchange Chairman Tomas Jezek. "The price of stock often has nothing to do with its real value."
IPB was the biggest poker player of all. Of the big four banks, IPB has the most insider control--companies with close ties to the bank own at least 37% of its shares. After Nomura, the second-largest shareholder is a Czech company affiliated with IPB. Nomura inherits a portfolio with as much as 20% in bad loans, as well as a poorly run investment arm and scandal-plagued staff.
HARD CHOICES. To resell its IPB stake at a profit, Nomura must make tough decisions that the government long has avoided. The Japanese lender probably will separate IPB's banking and investment-fund divisions and pare down the staff. Once Nomura's share capital is increased in April, the Japanese lender will own 71% of IPB. This will give Nomura enough clout either to demand that IPB write off its bad loans or force creditors to restructure as a condition of further funding, says Prague-based banking consultant Mark Rooney.
Meanwhile, the remaining three state banks and their potential foreign acquirers will be watching closely. By privatizing the other lenders, the state could touch off a wave of restructuring in the banking sector. That, in turn, could boost the efficiency of the Czech capital markets and lead to fairer valuations of companies traded on the Prague exchange.
By shaking up the banks and choking off the flow of easy money to enterprises, the government risks prolonging the Czech economy's slump. But Tosovsky seems to understand that such drastic action is key to resuscitating the Czech economy and spurring growth.