Jan Macháček

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Czech Business Weekly

Capitalism without responsibility

29. 05. 2006
In the final session of the lower house of Parliament before the June 2–3 elections, Social Democrat (ČSSD) and Communist (KSČM) MPs joined forces to override a presidential veto, this time of the new Labor Code, as well as a controversial law concerning non-profit hospitals.

Both of the norms go against the will of ČSSD’s coalition partners, and both went unannounced in the party’s electoral plans and government programs.

The new Labor Code will freeze the status quo of the typically inflexible labor market and goes against the necessary reforms, while the new law lists particular hospitals that will receive guaranteed payments from the insurance system. This goes against the spirit of “good” laws, which are supposed to deal with abstract situations and shouldn’t name concrete subjects.

These may be the first signs of what’s in store should ČSSD win the elections and rule with the silent support of the KSČM.

Meanwhile, 142 MPs across the ideological spectrum voted to compensate the depositors of three bankrupt lenders: Union banka, which went under in 2002, and Plzeňská banka and Kreditní banka Plzeň, which collapsed in 1996.

It should be noted that this particular piece of legislation has been repeatedly submitted by Civic Democrat (ODS) MPs. In March this year, it garnered the support of 100 MPs, while just one year ago that figure was only 56. Why?

In the event of a bank’s failure, current Czech law guarantees every small account holder 90 percent of the deposited amount, up to Kč 800,000 (€ 28,340), but in the historical Czech banking scandals of the 1990s, the Czech National Bank (ČNB) compensated depositors of some failed banks up to Kč 4 million. The stated rationale was that the banking crisis threatened to spread to the entire sector; regulatory authorities reacted to an extraordinary situation with special tactics; it had to calm the nerves of depositors nationwide.

In the second half of 1990s, Parliament decided to pay Kč 4 million to depositors of some other failed banks – for instance, Česká banka. After last week’s vote (if approved by the Senate and president), all clients of any failed banks can be compensated up to Kč 4 million, or roughly 15 times above what the law allows.

What’s so scandalous about that? Firstly, it creates a moral hazard; capitalism without responsibility, taking risks with someone else’s money. The level of mandatory deposit insurance is fully compatible with the EU standards; there should always be some level of risk. Secondly, MPs have ordered the privately financed fund of insurance of deposits to cover the bill; this amounts to a “special tax” or, more accurately, expropriation of private property.

Finally, not only will depositors be compensated, a Czech first, but the big financial players will be covered as well. In 1997 Česká pojištovna, then owner of failed Kreditní banka Plzeň, voluntarily compensated small depositors up to Kč 4 million; now Česká pojišťovna (controlled by PPF) will be compensated for this. Basically, the richest man in the country, Petr Kellner, will be paid up to Kč 1.75 billion from the pockets of his competitors.

The fact that all political parties signed on to this bizarre deal signals that depositors of small banks have united to hire good lawyers and lobbyists, who’ll be paid handsomely once the deal is sealed, and who in turn will handle the payoffs to certain MPs and political parties.

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