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Merrill Lynch: Systemic Risks in the Czech Banking Sector Set to Decline

23.6.2000 16:45

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.

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