First-ever Czech IPO and Eurobond issue offset the effects of political crisis on the Czech financial markets -- but what of the economic reforms?

01-07-2004

For the past decade, unstable governance by de facto minority rule has marked the Czech political landscape. Head research analyst Jan Schiesser of the Atlantik brokerage says a caretaker government may now be the only way to proceed with much-needed — but politically painful — economic reforms.

No election since 1993 has produced a Czech government with a majority of more than one — most have been minority governments — so it seems the system is inherently unstable. So given that, it couldn't have been too much of a surprise to the markets that the Spidla cabinet was going to — eventually — go under?

"Well, actually, from my point of view, it was a little surprising because the expectations were that Spidla would still, at this time, survive, and the coalition government would go forward."

What was the reaction from the market? There was a slight movement of the crown, the Czech currency, but other than that?

"Surprisingly, the market reaction was very mild. Basically, the most sensitive were Czech bonds, which went down, price wise, 100 basis points. But the reaction of the crown was very small, by 20 hellers, up to 20 hellers. And stock prices were basically stable, except for a small downward correction on Monday morning."

Now, on news of the collapse, or the resignation, rather, of Spidla's government, came the same week as the first-ever initial public offering (IPO) in the Czech Republic. So, did that help offset the bad news for the market?

Bohuslav Sobotka, photo, CTKBohuslav Sobotka, photo, CTK "There were two important issues the week prior to the fall. One was the first Czech Eurobond, which was placed among institutional investors abroad — and I think that the Minister of Finance [Bohuslav Sobotka] was very lucky placing it prior to this political crisis because in the current set up, I think it would be very, very difficult and would be much more pricey then a week ago. And, actually, the IPO of [pharmaceutical firm] Zentiva was also very well timed because it would also be difficult to place it right now."

Given the political instability, generally speaking, how does that affect the Czech Republic's country rating, for example, from an agency like Moody's Investors Service?

"Well, at the moment there is no effect and there won't be any immediate impact on the rating, since the most important fact is that we are a member of the European Union since May the first. And that is basically defining — in the long term — how the country will develop not only from the economic point of view but also from the political point of view. So we cannot expect any reaction from the rating agencies."

"The question is what will happen now, how quickly the new cabinet will be created, and what it will look like."

And do you have any predictions in that regard?

"I think the process of creating a new cabinet will be quite lengthy and difficult — I think more difficult actually than people can imagine right now, since the former — or still current — coalition parties don't have a majority in the lower house of Parliament and I can hardly imagine how they can gain a majority, even a slim majority of two votes."

"And from the medium-term point of view for the country, the best solution would be either early elections or a technocratic cabinet, made up of professionals who would basically do all the needed reforms."

So, a caretaker government, like that of Josef Tosovsky, the former Governor of the Czech National Bank CNB? [Which took over after the fall Civic Democrat-led government, and was in place from January to July 1998]

Josef TosovskyJosef Tosovsky "Yes, exactly, and that this caretaker government would make the needed reforms that are politically very difficult to do, but which from the economic point of view the country must do."

Speaking of reforms, Mr Spidla had, late last year, staked his political< future on such a reform package. And I see here from your [Atlantik] analysis, that the first real test of any reshuffled cabinet will be the 2005 budget, which will see its first reading in Parliament in September. And otherwise, all the key decisions are postponed anyway until 2006, when regular elections would be.

So how would a caretaker government be better suited to push those through?

"Well, a caretaker government would get basically, approval from all the political parties, or at least the Social Democrats, the Civic Democrats and Christian Democrats to do certain reforms. I can imagine, you know, a list of reforms starting with pension reform and the reduction of social subsidies, liberalisation of the labour market and de-regularisation of rents — especially those four points — and would get two years to do those reforms."

"But, probably, from a political point of view, it would be a rather difficult situation because these parties have voters that prefer very different goals. So, since these reforms would be very painful for the Czech citizens, it's a question of whether the parties would really support the cabinet until the elections, now set for mid-2006."

And what about early elections? For many months, it didn't look like the main opposition party, the Civic Democrats, were in favour of early elections — and now they are pushing for them.

Civic Democrats, photo: CTKCivic Democrats, photo: CTK "For me it is slightly surprising that the Civic Democrats quite significantly changed their view on early elections in a relatively short time period. Probably the main reason was their strong elections results, in the elections to the European Parliament [held in mid-June. The Civic Democrats placed first, the Social Democrats of Vladimir Spidla placed fifth.]. And then some polls done afterwards that showed even higher preferences [for the Civic Democrats].

"The question— or the uncertainty I think some voters have — is what the Civic Democrats would do because, frankly, I'm not aware of any solid economic package they would be able to give voters and investors to assess."

01-07-2004

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