The shakiness of the current financial and economic structures in the Czech Republic was highlighted again over the past couple of weeks, when the Investment and Postal Bank (IPB), until recently owned by the Japanese bank Nomura, found itself in serious financial difficulties, experienced a serious run on its funds, was placed in the hands of an official receiver and was then quickly sold by the Czech state to a Belgian owner.
IPB is the third largest bank in the Czech Republic with three million customers and holds a considerable portfolio in many sectors of the Czech economy Among other things, IPB now seems to be the owner and financier of Vladimír Železný's commercial Nova TV - and Nova TV has been reporting on IPB's difficulties from a position which is very close to that of the bank.
There is a serious lack of transparency in Czech financial and banking structures, and it is difficult to say exactly what influence IPB has had in Czech society. Suffice it to say that, according to observers, the influence has been substantial: there are uncofirmed rumours that some of the top officers of the bank were basically "running the Czech economy." Some have said that IPB was, in essence, a Russian phenomenon - a powerful, shady financial grouping which exercised huge economic and social influence.
On 16 June, the Czech government took IPB out of the hands of its Board of Directors and handed it over to an official government receiver (nucená správa), after it became known that some CZK 57 billion (approximately USD 1.6 billion ) were siphoned off from the bank between February and June 2000.
These reports caused a serious run on the deposits. Within a few days, companies withdrew CZK 17 billion [USD 440 million], whlie private customers withdrew CZK six billion [160 million]. All this information was underreported in the Czech media - some outlets media were decidedly unenthusiastic about reporting what was going on at IPB.
Announcing that it had placed IPB in receivership, the government issued the following statement:
Wishing to protect deposits in the Investment and Postal Bank and to protect the stability of the banking sector, the Czech National Bank [ie the Czech central bank] decided today [16 June] to place the Investment and Postal Bank in the hands of an official receiver.
This has been done with the approval of the Czech government, and is in-line with previous statements by the government on this matter. IPB branches remain open and its customers continue to have access to their funds.
The Czech National Bank has also issued a 100 per cent guarantee of customers' deposits. From today, IPB will be run by an official receiver named by the Czech National Bank.
There is no reason for anyone to fear that they might lose funds deposited in IPB there is no reason for withdrawing them.
As a result of speedy withdrawals of funds from the IPB earlier this week, the bank found itself with serious liquidity difficulties. IPB told the Central Bank that it would not be capable, on its own, of fulfilling its obligations to its customers. After placing the IPB in the hands of an official receiver, the Czech National Bank is guaranteeing funds held by IPB...
It would appear that IPB's Board of Governors behaved as though they lived still under Communism. They treated the bank and its resources recklessly, often for personal benefit, and, when the bank found itself nearing bankruptcy, they expected the government to pay the tab.
The government, however, refused to do so and arranged a quick sale of the bank to another financial institution, Československá obchodní banka, which is owned by the Belgian bank KBC. Václav Klaus and the Civic Democratic Party sharply criticised the decision at the end of the week, but did not offer an alternate solution.
Some Czech media are reluctant to delve into the shady background of the IPB scandal. Still, a Prague journalist suggested that something may be afoot:
A few days ago, police commandoes stormed the offices of IPB. The action was criticised by commentators as an overreaction on the part of the Czech government, but it is quite likely that it was justified. Czech police have officially confirmed that the anti-corrupion squad (Služba pro odhalování korupce) is investigating charges raised against IPB by the Czech central bank before IPB was placed in receivership. No further information is available, which may signal that a truly serious matter is being investigated.
According to unofficial sources, between CZK 3 and 12 million [USD 77,000 and USD 310,000] was allegedly transferred out of IPB and into foreign accounts when the scandal broke, and documents are alleged to have disasppeared. If these reports are confirmed, it would undoubtedly mean that swift police action was fully justified.
Reports in the Czech press point to what may be the heart of the matter. Both the official receiver and IPB's new ownders are finding it very difficult to ascertain who owns what in the IPB Group. It is unclear, for instance, for instance, how IPB owns [second Czech commercial TV station] TV Prima.
On Friday, 23 June, Czech Deputy Finance Minister Jan Mládek said that prior to the bank being placed in receivership, IPB managers warned government officials that no one would ever be able to unravel who owns what in IPB.
It is obvious that the Czech government had to act quickly. Any delays would have meant that more money would have disappeared from IPB, branches would have been closed and customers would have lost their money.
Surely, it is rather interesting that Václav Klaus, the head of the Civic Democratic Party, is being so critical of the government for quickly selling IPB to a Belgian-owned bank. Klaus called the government's action a "bank robbery," but it is obvious that any more delays would only have led to further removal of important documents and funds. It begs the question: is the root of Klaus' anger the possibility that the conspiracy now being investigated is somehow connected with the financing of Czech political parties?
In Britské listy, Milan Šmíd outlined the influence of IPB over the Czech media, noting that the bank has always been rather adept at spin doctoring:
When the Coopers and Lybrand audit of the IPB in 1997 was unfavourable, IPB hired a different auditing firm (Ernst and Young) and, lo and behold, the audit results became favourable! (See the Prague Business Journal, 31 May 2000). IPB also applied another useful trick: it regularly removed bad debts from its own books to the books of subsidiary companies created in parts of the world where banking regulations are slack, including companies registerted in the Cayman Islands. It may well be that, over the past six months, the Czech Central Bank has been criticised in the media exactly because it refused to recognise such IPB operations (worth large sums of money) as acceptable.
Some months ago, when the Czech government decided to sell another large Czech bank, Ceská sporitelna, to the Austrian banking giant Erste, IPB was trying to solve its financial problems by devouring Ceská sporitelna. Is it coincidental that the Prague newspaper Lidové noviny ran a sustained campaign against the sale of Ceská sporitelna to Erste?
It was obvious for quite some time that the "boys from IPB," unscrupulous and untrustworthy bankers, were a problem. Previously, the Czech government tried to solve the problem by selling the bank to the Japanese financial giant Nomura, hoping that the Japanese owners would bring IPB under control.
But what eventually matters is the state of financial regulation of the banking environment. As Pavel Páral wrote in the Euro weekly (No 25/2000):
The Czech central bank and the Czech government previously tried to solve the problem by selling the IPB to the Japanese, hoping that they might able to master the "boys from the IPB," who had become much more powerful than the Czech government itself. But, instead, Nomura split the business with them, and government was left with a burden on its hand. Nomura sold a handful of Czech breweries and made a substantial profit
Milan Šmíd has characterised the typical features of the current Czech "client capitalism" thusly:
I do not think that there are open, mafia-like financial organisations in the Czech Republic now. However, there is a certain type of behaviour which has become a salient feature of Czech economic and political life as a result of the activities of individuals who, although they may not have joined hands in an organised conspiracy, have nonetheless followed their own interests. In this, they have used the same tried and tested methods and modes of behaviour that were so effective under the Communist regime
As we have said, some Czech media are biased favourably towards IPB in their reporting. In Milan Šmíd's view, it is possible to deduce from their reports which media outlets are under IPB's direct influence.
Thus, some media have argued that because the Czech government has bailed out many failing banks, it should do the same for IPB. What is conveniently forgotten is that Nomura was given a very worthy investment protfolio and was able to recoup its original investment by selling the breweries within those holdings.
Nova Television has been particularly critical of the fact that police took quick action against IPB . Vladimír Železný, in his weekly Saturday noontime broadcast "Call the Director," spoke out against police action on both 17 June and 23 June.
In February, Nova Television unreasonably attacked the Czech central bank in connection with another transaction, and it may well be that the February attack was motivated by the fact that the central bank was carrying out an audit of IPB and it did not like what it found there.
Financial relations between IPB, MEF Holdings and Nova Television are unclear, but there are connections. It is interesting that the formerly Communist daily newspaper (Rudé) právo also now tends to favour the cause of indigenous capitalists, and the daily seems to be rather reluctant to look into the shady background of IPB's dealings.
IPB, it is worth remembering, provided a
|Travelling to the Czech Republic soon? Choose Hotels Central at HotelsCzech.com to reserve a hotel online at a great price.|
If some in the Czech Republic now feel unease about the influence of IPB over specific media outlets, people would do well to remember that weak government regulation is at fault.
The regulatory Council for Radio and Television Broadcasting should never have approved the transfer of Nova (and possibly Prima!) TV to IPB. Surely they should have realised that this would mean the bank would be able to excercise impermissible influence over public opinion.
The entire mess is a result of the particular and extremely shady manner in which privatization has proceeded in the Czech lands, the hallmark of which has been the stripping of assets for private gain. As a result of the 1990 State Companies Act, most state-owned businesses were placed in the hands of state bureaucrats who could do what they wanted with them.
"Often, they stole these companies, sometimes in return for bribes," said current Czech Finance Minister Pavel Mertlík in the bi-monthly Listy some time ago.
Commenting on this statement on 7 June for Lidové noviny, Petr Fischer said "Decisions about the future of state-owned businesses were made by a handful of bureaucrats.
As a result, former state businesses were placed in the hands of people whose only interest was the stripping of assets followed by a rapid departure from the scene. Asset stripping then accellerated with the arrival of so-called "coupon privatisation," which was similarly unregulated and opaque.
This, then, was the culture from which IPB grew.
Jan Čulík, 25 June 2000
Jan Čulík is the publisher of the Czech Internet daily Britské listy.