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State seeks to settle with ČSOB

Analysts expect IPB dispute will end in 'quiet agreement'

By Riva Froymovich
Staff Writer, The Prague Post
August 1st, 2007 issue

After filing a counter lawsuit against ČSOB for 26.7 billion Kč ($1.3 billion), the government hopes to reach a settlement with the bank outside of court, according to the Finance Ministry.
The lawsuit stems from a 7-year-old deal between the government and ČSOB, which, in 2000, took over the collapsed bank Investiční a poštovní banka (IPB) from the government in return for clearance of IPB’s debts.
After years of failed negotiation, ČSOB, the country’s largest bank by assets, filed a lawsuit against the government in June at the International Arbitration Court in Paris, seeking 1.7 billion Kč in compensation for what it says is the accounting value of one former IPB asset, J. Ring. The government says J. Ring is not included in its debt guarantee and that ČSOB has made unjustified profits from its deal. So last week the state countersued, seeking compensation for its clearing of IPB’s debts.
“ČSOB strongly denies allegations that it might have enriched itself to the detriment of the state,” said Ondřej Vychodil, spokesman for the bank, who still has not seen the surprise counterclaim filed by the government.
In June 2000, the Czech National Bank (ČNB) put a fraught IPB under forced administration after a run on its deposits. The ČNB then sold the bank to ČSOB with government guarantees that it would not have responsibility for IPB’s 100 billion Kč debt. Instead, those losses were transferred to the Czech Consolidation Agency (ČKA). Before its bankruptcy, IPB was the fourth-largest bank in the country.
“We have a different Cabinet now. We think state intervention was necessary, but it was very expensive for taxpayers,” said Jakub Haas, spokesman for the Finance Ministry.
“The Czech Republic had already made a payment of approximately 150 billion Kč under the state guarantee,” he added. The country hopes to settle with ČSOB, but more payments are not an option.  
“The Finance Ministry does not intend to ‘rein in the banking industry,’ ” he said. “However, the interests of the Czech state must be properly protected.”
ČSOB overstepped its boundaries and the Finance Ministry wants to show its power, said Evžen Kočenda, a professor at the Center for Economic Research and Graduate Education at Charles University.
But the show will likely end in a quiet agreement, Kočenda said.
“ČSOB is of the legal opinion that the state guarantee issued by the Finance Ministry covered this case,” Vychodil said. “We are sure this claim [the government] made yesterday can’t have any real substance in it. We have no idea how they could get this number.”
“We weren’t consulted before it was reported,” and didn’t even know about the lawsuit until it was broadcast in the media, he said.
If ČSOB loses the case, it would cost its Belgian owner, KBC Bank NV, more than half of its reserves, according to published reports.
But most analysts are convinced that ČSOB will weather this storm.
“The bank is simply too large to fail,” said Markéta Šichtařová, director of Next Finance. And, if the bank’s capital was threatened, “the state would be careful enough to pass a helpful hand — just like it did in the IPB case.”
“A failure of such a large subject could result in a failure of the whole financial system,” Šichtařová said. “No government or central bank authorities would be willing to let that happen.”
Since last year, officials have warned of an impending arbitration lawsuit from ČSOB, including former Finance Minister Bohuslav Sobotka of the Social Democratic Party.
A 2005 audit of the ČKA reportedly showed that ČSOB was not entitled to seek compensation for some of the transferred loans; the bailout agency then demanded ČSOB return 17 billion Kč. It returned 2.17 billion Kč, but refused further payments on account of government guarantees.
— Naďa Černá and Hela Balínová contributed to this report.

Riva Froymovich can be reached at rfroymovich@praguepost.com


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