Slovak economy dented by court ruling

14-01-2005

An international arbitration court in Washington has ruled that Slovakia must pay 617 million euros to the Czech bank - CSOB. The case dates back to the early nineties and is linked to the debts of state owned companies from this period. The decision is bad news for Slovak public finances - the public deficit could go up by 1.9% at a time when Bratislava is fighting to keep it as low as possible so it can adopt the Euro in about 4 years time.

617 million euros. That's the amount that Slovakia will have to pay to the Czech bank CSOB following the decision of an arbitration court in Washington. In the early 1990s the Slovak Ministry of Finance set up an agency in charge of settling the debt that Slovak state companies then owed CSOB. This agency took a loan from the same bank whose long overdue credits it was supposed to collect. The agency failed in both paying back the loan, and collecting money from companies. In 1997 CSOB filed a complaint against Slovakia with the arbitration court in Washington. Eight years later its decision came as an unwanted Christmas present for the current Finance Minister Ivan Miklos:

"We are witnessing the explosion of a time bomb we inherited from the previous government of populist premier Vladimir Meciar. This is the consequence of poor economic policy."

What worries Miklos so much is that should Slovakia be forced to pay this sum, then its public deficit will grow by 1.9% of GDP at a time when the government is struggling to keep it at around 3% in order to be able to adopt the euro in 2008.

"Our lawyers are investigating the possibility of an appeal. The court set the 28th of January as the deadline for the payment to be made. In case we decide to appeal, we have another three months to do so. Failing to meet any of these deadlines will result in penalties of 5 percent per year."

CSOB's spokesperson Milan Tomanek regards Slovakia's potential appeal as a trick:

"Slovakia is trying once again to buy time. I don't really think they can change the court's decision. We have been open to negotiations concerning the option of dividing the sum into instalments. However, we are determined to settle this dispute once and for all as soon as possible."

Back on the Slovak side, the director of the Debt and Liquidity Management Agency Daniel Bytcanek said that if the government were obliged to settle this sum, it would issue more bonds than originally planned on the local market.

"I don't see any problem in paying this sum because the state treasury can borrow cheaply on both local and international markets. And it can also use the state reserves to cover part of the debt."

The Government will decide how to officially respond to the court's decision by January 22nd.

14-01-2005