Jan Macháček


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Czech Business Weekly

Enjoy the isolation but the ‘subprime’ wolf may still reach our door

17. 09. 2007
While international financial markets try to absorb losses from the U.S. subprime mortgage crisis, the Czech Republic appears absolutely immune or even isolated—this time for the better—from the rest of the world, despite the prevalent perception of finance and economics as increasingly globalized.

While most world financial analysts expect eurozone and American interest rates to fall, the Czech National Bank (ČNB) set about dealing with general pre-crisis expectations by raising the Czech rates. While U.S. President George W. Bush has promised some assistance—but not a bailout—to homeowners suffering losses, while the new chief of the Fed spoke about a credit crunch and a world on tenterhooks read his lips, while many hedge funds and German banks have got themselves into trouble, while some French investment funds also seem to be walking rather too close to the edge, all is quiet on the Czech front. Most Czechs do not even know something is going on. Are we Czechs really so smart that we can live one step removed from such economic woes?


Let’s consider:


• Even though the Czech economy is growing quite miraculously, we are still relatively poor. No one is running around Prague chasing rich clients for hedge funds.


• Czech banks are mostly daughter companies of prominent Western owners. If anybody was betting on structured bonds and collateralized debt obligations, it was the parent companies.


• Bank competition is still not as unrelenting as that found in the West and depositors remain largely oblivious of various consumer trends. Banks here can therefore substantially live from fees, comfortably earning billions of crowns without venturing into risky products.


• From a regulatory perspective, the Czech banking world is, in stark contrast to German banking, simple and transparent. The German banking ownership structure requires reform. There are municipality-owned spaarkassen savings banks, state-owned landesbank banks and federal, privately owned banks. All have investment banking subsidiaries.


• Though the number of Czech mortgage holders is growing, it is nothing compared to the U.S. where almost everyone has a mortgage. Moreover, Czechs usually have a fixed interest rate on their mortgage, very few Czech people or firms speculate on the capital markets.


But don’t start counting your chickens. … If the subprime mortgage crunch drags down the global, and especially the German, growth rate, the impact will hit home.

The case for Tošovský

While most Czech commentators believe ex-ČNB governor and former caretaker Prime Minister Josef Tošovský has betrayed his motherland by accepting Russia’s nomination for the International Monetary Fund (IMF) presidency, the Financial Times is not so enthusiastic about the European Union’s French candidate Dominique Strauss-Kahn, whom the normally Euroskeptic Czech government has obediently embraced.

Sizing up the candidacies of Strauss-Kahn and Tošovský—currently chairman of the prestigious Financial Stability Institute (FSI) for the Bank for International Settlements—an FT editorial said, “Nobody could argue Mr. Strauss-Kahn is the best qualified candidate in the world by his experience, intellect or training.” But there is more to be considered. “Emerging countries no longer understand why Europeans should determine who might dictate to them in any crisis, as if their old empires still existed. The IMF is either a global institution with a head chosen by the world, or it is an expression of Europe’s will to cling on to every scrap of its prestige and power. In this latter guise, the fund will be shorn of all legitimacy,” the FT said.

It is depressing to hear the Russians speak more sense about the future of the IMF than the EU, the editorial added. Russia’s IMF executive director Aleksei Mozhin has said that the IMF is facing a “severe crisis” of legitimacy. “We must select the best candidate,” he said.

Tošovský is also a European, but he is an international monetary policy and banking regulation expert. Czech commentators may disagree, but hundreds of central bank governors worldwide are convinced of this. But IMF rules say only the EU or Russia can propose a European, and the EU has gone for a politician, Strauss-Kahn, whose understanding of public finance is similar to that of, say, Miroslav Kalousek.

It is ludicrous to blame Tošovský for the small bank failures of the ’90s. Enormous political pressure existed to grant banking licenses and finance or postpone bank privatizations. The Civic Democrats (ODS) refused proper capital market regulation while claiming banking supervision was too rigid.

The reasons Tošovský is not backed by the current political administration lie somewhere else. He earned disfavor by taking over the prime minister post from Václav Klaus and by closing down the IPB and Agrobanka banks. Ever since, Tošovský has faced sustained mud throwing. Yes, he is a former communist, but daily Mladá fronta Dnes, which has even labeled him a former communist secret police (StB) collaborator, should look at its own house first. It is packed with former communists and ex-secret police agents. Tošovský rebuts MFD’s allegations.

On the other hand, Tošovský s PR is rather strange. He has not spoken to a journalist in seven years. As IMF director, he would be under constant scrutiny.

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