The following are highlights from the newest Merrill lynch Report on the Czech Banking:
We believe that the dramatic developments in the Czech banking
sector over the past two weeks represent positive news for the country's
economy and capital markets. The forced administration of troubled IPB
(not covered), followed by the quick sale to CSOB (not listed) was a very
elegant way to diffuse a problem in the Czech banking sector and the whole
economy.
The way the transaction was executed prevented potentially much
higher monetary losses (higher costs to taxpayers, lower GDP growth) as
well as non-monetary damage (further loss of confidence in the banking
sector and further extension of the credit crunch).
The speed of this action is reminiscent of the successful resolution
of the Barings Bank crisis in the UK, and should be credited to the Czech
National Bank and the Ministry of Finance.
IPB was the last big commercial bank with a large amount of
non-performing loans inadequately covered by provisions. We therefore
believe that the "clean up" and restructuring of the Czech banking sector
will soon be complete. This should reduce risk, which has been negatively
influencing perceptions of the Czech economy, banking system and capital
markets for several years.
It seems that the government will have to cover losses relating to
the failure of IPB. The first estimate (from the government) is around
CZK50bn (USD1.3bn). This is likely to increase the state budget deficit
this and next year and, consequently, the government's debt level. This
could force the government to accelerate the privatisation of telecoms and
utilities - potentially positive news for the economy and capital markets.
In addition, level of the country's gross external debt (USD22.6bn at the
end of 1999, or 41% of GDP) is not excessive and should not have a strong
impact on the currency.
If Komercni banka (KMCBF, Neutral [D-3-2-9], CZK734) is successfully
privatised early next year, all Czech banks will be fully private and hold
a relatively low amount of non-performing loans. As a result, economic
growth could accelerate and sentiment towards the equity market could also
improve.
The quick resolution of the IPB problem has prompted a harsh
reaction from some politicians, mainly from the ODS party. Despite this,
we do not believe that this issue alone should lead to a political crisis.
The most recent public opinion poll shows that ODS would not benefit from
early elections.
Copyright by Merrill Lynch, 2000.