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Czech Watch – 6 November 2001

6.11.2001 12:25

- Deputy PM Vladimir Spidla and Defence Minister Jaroslav Tvrdik completed political discussion on army reform with parliamentary parties. According to Tvrdik, the parties agree with the reform principles and goals in general, but future location of garrisons poses a political problem. Tvrdik emphasized that the reform must not end with the next year's elections and announced that he was going to start the pilot projects of the reform (namely the construction of military bases of a new kind) as soon as possible. The government plans that in 2007 the army is to be fully professional with 35t soldiers and 10t civilian employees.

- The Ministry of Finance announced that the work on the bill on collective investment had to be suspended because the EU would publish a new EU regulation that must be included in the bill. The deadline for submitting the bill to the government has been therefore postponed to late September 2002. Originally, the bill should have come in force as soon as on January 1, 2003. The main goal of the bill is to harmonize the Czech legislation with the EU legislation, unify terminology and enlarge the number of collective investment products Czech investors will be offered to use. The Czech Association of Investment Companies (UNIS), which is taking part in drafting the bill, said that collective investment would not be affected by the postponement.

- CKA announced that the first tranche of problem assets of the former IPB bank worth a nominal CZK 4.4bn would be transferred from CSOB to the bail-out agency CKA on Thursday. Also on Thursday, CKA will pay CSOB the book value of the transferred assets. The second tranche in the book value of CZK 7.7bn will take place before the end of November. The third tranche will follow in December and the remaining two will take place in January and February 2002. Framework agreements on the volume of assets to be transferred within the last two tranches have not yet been signed. Apart from loans, real estate and securities will also be transferred to CKA. According to the government-approved restructuring plan, the overall nominal value of the “black” assets to be transferred to the CKA until February 2002 is CZK 46bn.

- A CTK source says that the sanctions to be imposed for the non-fulfilment of conditions by the future owner of the privatized power sector are disproportionate, with a penalty in the order of billions of crowns for possible breach of a contract worth just millions. For example, the source quotes the sanctions for the non-fulfilment of the condition to buy 30 million tonnes of coal annually for 15 years. If the investor buys 1-10 % less than he is bound to by the contract, the sanction should amount to 10 % of the purchase price. Another condition binds the investor to produce a certain amount of electricity at coal-fired power plants and a certain amount at nuclear power plants but does not say what would happen if the plant had to be closed for technical or some other reasons outside the investor's power. The bidders for the Czech power sector include the French EdF, the consortium of British company International Power and US company NRG, and the group of Italian company Enel and Spanish company Iberdrola. Belgian Electrabel has pulled out of the tender.

- The Czech crown had opened at 33.46 against the euro on Monday and then only negligibly strengthened during the day in calm trading without remarkable volatility. Against the dollar, the crown had opened at 37.24 and then tracked the EUR/USD development. After weakening in the first part of the session up to 37.40 CZK/USD, the crown recovered in the afternoon and closed at 37.31/33 on Monday, down from late Friday’s 37.05/07. CZK/EUR was trading at 33.44/47 late on Monday, up from 33.50/53 on Friday evening.

- Bond prices fell in the morning but then rose again in the afternoon on Monday. The morning sell-offs concerned primarily longest state benchmarks and low-liquidity issues and reached up to 1 % compared to closing values on Friday. Revived appetite for Czech bonds in the afternoon originated partly abroad and touched both the short end and the long end of the yield curve. The longest state 6.95/16 benchmark gained 10bps on Monday to 115.55/85, yielding 5.36/33 %. The state 6.75/05 bond also rose 10bps to 105.80/05 compared to Friday’s close, yielding 5.79/70 %.

Late on November 5 bond yield Late on November 2
State 6.75/05105.80/055.79/70105.70/95
State 6.95/16115.55/855.36/33115.45/75

(Martin Kupka)

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