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September 7th, 2008
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Regions warned against risks

ČNB: Towns have put billions of crowns into loan-powered securities

By Paul Voosen
Staff Writer, The Prague Post
March 7th, 2007 issue

Regional and town governments in the Czech Republic are investing billions of their citizens’ crowns in high-risk securities that use loans to boost their purchasing power, the Czech National Bank (ČNB) has warned.

Last month, the bank sent a letter to the country’s regional officials and mayors, concerned that many were investing in these securities without knowing all of the dangers involved — dangers that have been brought into focus by the recent worldwide stock slump.
“Investment products are becoming more and more sophisticated,” said Pavel Zúbek, spokesman for the bank. “We don’t want to discourage regions from investing. We just want them to be careful.”
The Prague Stock Exchange (BCPP) is home to several billion crowns of regional funds invested in high-risk securities, said Petr Koblic, BCPP general director.
Mostly these securities fall into two types: repo transactions and margin trading. While the specifics vary, both allow investors to use loans to boost the amount of money they have in play on the stock exchange.
These loans are common throughout the world, mostly used by savvy investors over the short term. When the market is bullish, investors can score high returns. But, when the market tanks, they risk losing an exaggerated amount of their principal to the bank or broker. If stocks fall low enough, they can lose it all.
Triggered by a confidence crisis of investors on the Shanghai Stock Exchange, stocks worldwide have gone into a slump. During the week of Feb. 26, the BCPP dropped 5.38 percent, the exchange’s biggest decline since June.
It would take a bigger drop than that for the regions to panic. But the ČNB believes an awareness campaign is necessary, as many regions may have been misled by marketing promising that these investments were as safe as bank accounts.
Not all regions were so misled, and some report good experiences. South Bohemia had 250 million Kč ($12 million) invested through repo transactions until the end of last year, said Jan Zahradník, the region’s governor. Though the region isn’t renewing its account, he thought the investment went well.
“Even before the ČNB’s letter, we were aware of the risks,” he said. “There will be no new investments in repo transactions, but it’s not because of fear. … This should not stir a panic.”
The stock exchange and national bank can’t control where the regions put their money. But the two organizations are now in talks on how existing regulations of loan-based securities can be improved, said Jiří Opletal, deputy director of the BCPP.
Legislation, though far off, could be drafted to decrease the size of the loans, or a self-regulating mechanism could be setup within the stock exchange, he said.
Naďa Černá contributed to this report.

Paul Voosen can be reached at pvoosen@praguepost.com


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