Czech Watch - 11 July 2001

- Vaclav Havel and his Portuguese counterpart Jorge Sampaio stated during their meeting in Prague that EU enlargement is tightly connected with European integration and has to be widely supported. Sampaio believes that the candidate countries could take part in the European Parliament election in 2004. Both presidents agreed that in the long-run perspective each EU country could be represented by the same number of representatives in one chamber of the European Parliament. By this change, equality of all countries would be emphasized and dangerous dominance of larger countries prevented.

- According to an annual report by the UN, the Czech Republic improved its human development index (HDI) and advanced from the 35th rank in 1999 to the 34th rank among 162 countries in 2000. The Czech Republic now holds the second best position among all post-communist countries (after Slovenia) in terms of life expectancy, level of education, health care and people's real incomes. In the category of technological achievements index (TAI), Czechs achieved the best result of all post-communist countries. The TAI index ranks countries based on the development of new technologies, spread of new technologies, and the level of commonly applied technologies, such as telephones and energy consumption.

- The head of the Czech Agricultural Chamber, Vaclav Hlavacek, estimates that the preparation of the Czech agricultural sector for accession to the EU will cost over CZK 80bn. Out of the total, CZK 41bn should come from the state budget, since it is necessary to adopt legislative measures and to build new institutions. The rest (about CZK 42bn) will be paid by consumers due to the necessity to bring prices of farmers' products closer to the EU standards. With respect to the institutional background, Hlavacek criticized that the state aid to marketing organizations is insufficient, the Agricultural Intervention Fund is inadequate, and there is no payment agency which would be in charge of an allocation of finances from EU funds.

- Ceska sporitelna (CS) has transferred non-performing assets worth CZK 7.9bn to Konsolidacni banka (KoB) by July 1. Agreement on the ring fencing process was part of the contract of sale of CS to Erste Bank last year. In the contract, the government promised a guarantee for CS's worst risk assets worth a maximum CZK 14.9bn. Also according to the contract, CS can transfer the claims to KoB if it fails to exact them. KoB, on the other hand, may buy some of the selected assets, if it finds that advantageous. The government guarantees last for five years from February 2000.

- The activity of Czech duty/tax free shops will probably be prolonged until 2003, after the Lower House passed the bill on consumption taxes and rejected the Senate's proposal that these shops should exist only until end-2001. President Havel must sign the legislation now. Government officials are afraid that surviving duty/tax free shops might threaten the country's accession to the European Union.

- Shares on the Prague Stock Exchange (BCPP) slipped again on Monday. The PX 50 index fell by 0.57 % to 404.4 points, the lowest level since April 1999. The blue-chip index PX-D was down by 0.83 % to 1073.6 points.

- The Czech crown continued in its recovery on Tuesday from last week’s weakness. The mood on emerging markets improved. The crown was a touch stronger at 33.87/90 to the euro late on Tuesday from the late Monday level of 33.94/97. The crown dollar stood at 39.59/61 from 40.06/08 late on Monday.

- The state 6.95/16 bond rose 30bps to 99.80/10 from late Monday, yielding 6.97/93 %. The state 6.75/05 rose 5bps to 101.85/15, yielding 6.15/05 %. The market awaits June inflation data, due on Wednesday morning. A Reuters poll showed market expectation of a 0.5 % month-on-month price growth. CNB said it would auction a CZK 4bn tranche of the 6.30/07 government bond on Friday. No limit yield was set for the auction. Bids are due by 10:00. Traders said the success of the auction would depend on demand by building societies and June inflation figures.

(Martin Kupka)