Few sectors unaffected by 2008 crisis

Business suddenly became front-page news when a U.S. banking collapse in September sent the world's biggest economy into a deep recession that has settled firmly into place for the foreseeable future. Europe's economy soon followed suit, and EU member states scrambled to put together their own rescue packages and figure out how to act in concert to repair the damage.

The biggest business stories before the crisis became even more relevant as each and every aspect of world economies were affected, the Czech Republic being no exception. Economic forecasts were reconsidered, big sales were sidelined and already struggling sectors, such as real estate, went from bad to worse in record time. The aftermath of these stories will play out through 2009, and likely beyond, before economic news can be considered good once again.

Prague bourse

The Prague Stock Exchange, perhaps one of the most visible barometers of investor confidence, closed out 2008 a humbler index after beginning the year above 1,700 and closing it out hovering slightly above 800, down 55 percent as of Dec. 19. The year end was a slight improvement over the deepest lows, seen when the PX index sank below 700 Oct. 27, a level not seen in nearly five years.

While the exchange fell slightly and steadily beginning in the second half of the year, a September banking collapse in the United States and the subsequent crisis in Europe touched off a tailspin mid September that the bourse has been hard pressed to recover from. CEO Petr Koblic maintained the drop is in step with regional markets and completely expected given the financial turmoil on U.S. markets.

"It's normal. If there's a big economic problem in the United States, you sell your shares in markets that are not the U.S. because they fall more. It's a reaction from U.S. investors to their domestic problem; they sell first the international markets they understand the least," he said.

But despite its performance, the bourse was successfully sold to the Vienna bourse by majority shareholders after an open bidding process that piqued interest from the Warsaw bourse and Nasdaq, among others. When it acquired 92 percent of the bourse, Vienna added Prague to a portfolio that includes the Ljubljana and Budapest stock exchanges, solidifying its position in Eastern Europe. Now, with the support of its new owner, the Prague bourse expects to expand the Prague Energy Exchange, Koblic said. The bourse began trading in Slovak electricity in October. In the future, the four sister exchanges may consider a switch to a single trade platform, he said.

The exchange may benefit from the current financial situation, however, as companies may turn to shareholders as a means to raise capital in an environment where bank loans are harder, if not impossible, to come by, Koblic said. This would be especially true for real estate companies such as Orco or ECM, two companies whose stock values were decimated more than 70 percent since the beginning of the year.

"I would say these companies are a little better off than the companies that are not listed. They actually get capital through the listing, so they should be in a better position than the companies that are solely dependent on original capital funding they go through loans," said Koblic.

- Claire Compton

AUTO INDUSTRY

Škoda's move to cut its workweek to four days is a reflection of how deeply the auto industry has been affected by the strong crown earlier in 2008 and the growing euro zone recession, and some analysts fear that things will only get worse in 2009.

The automaker's latest announcement comes on the heels of the industry's estimated 10,000 layoffs planned over the next few months, most of which will come from parts manufacturers connected with Škoda. Though Škoda initially announced that it wouldn't sack workers, it has in fact let go of 1,500 contracted employees since September. Production halts in September and October and a last-minute extension of the Christmas holidays mean less work for parts manufacturers who ship to Škoda, leading to more layoffs across the industry.

"We aren't just talking about Škoda. There are hundreds of smaller companies connected with Škoda," said Marek Hatlapatka, analyst at Cyrus.

As in most export-based industries, 2008 has proven to be one of the worst recorded years for the auto industry. Škoda reported losses of 2.3 billion Kč in the first half of the year, after the strong Czech currency and rising oil prices led to a slowdown in car sales. The situation seemed to be improving as the crown weakened throughout August and early September, but then repercussions from the Wall Street collapse hit Europe and sales slumped even further.

"The financial situation has affected the whole industry, not just us," Škoda Auto's Jaroslav Černy said.

Škoda planned the production halts and the workweek cut as measures against layoffs, and Černy remains optimistic that the company's latest efforts will prove effective. Union representatives agree and hope that such measures will allow manufacturers to keep further job cuts as a last resort.

"Many employers say they do not want to resort to layoffs because they would lose high-quality employees," said Milan Šubrt of the Association of Independent Unions.

But the predicted euro zone recession in 2009 will undoubtedly have further effects on the Czech auto industry and especially Škoda, which relies on the European Union for 89 percent of its business. Each slowdown in production means fewer workers are needed, and, though Škoda may not lay its core staff off, parts manufacturers across the Czech Republic will be forced to bear the brunt of any further production cuts.

- Stephan Delbos

AIRPORT PRIVATIZATION

The government began to finalize plans for the privatization of Prague Airport in 2008, the biggest government-led sale since Český Telecom was sold to Spain's Telefónica in 2005. The timeline has been expanded and amended recently, as economic troubles across the world have created less than ideal sale conditions, and the process will likely drag out through next year. The largest airport in the country, Ruzyně was valued over the summer at 100 billion Kč, and since Dec. 1 has been fully owned by the Finance Ministry.

The government officially sanctioned the decision to sell the majority share of the airport June 6. The government ordered Finance Minister Miroslav Kalousek to launch a tender to select an airport privatization advisor responsible for evaluating bids from interested buyers. At the time, Kalousek said he expected the sale of the airport to bring 100 billion Kč.

The expected timeline was likewise optimistic, and the Finance Ministry expected to finish privatization in the second half of 2008. Initial interest came from the French Aeroports de Paris and the Vienna and Frankfurt airports, and inquiries followed from airports in India, Singapore, Australia and the Czech financial and investment group Penta. Transportation Minister Aleš Řebíček has said the number of interested applicants totaled 70. Penta recently bought 73.5 hectares (181.6 acres) of airport real estate that will be the site of a new runway meant to enlarge airport capacity.

But plans and expectations for the sale were reconsidered with the advent of a European financial crisis. Řebíček admitted in an interview for the Austrian daily WirtschaftsBlatt that the price of the airport could be halved to 50 billion Kč.

"I can easily imagine that the amount of applicants will decrease with the effect of the financial crisis. We would still certainly prefer to sell it under the previously given price," Řebíček told the daily Hospodářské noviny Dec. 11. Řebíček believes that remaining applicants will be financial groups that already own an airport and want to expand. "Asian, American and Canadian financial groups will therefore be involved," he added.

November passed without a sale adviser selection, and current estimates show the tender process continuing through the spring. The actual sale will likely be prolonged a few more years.

According to the weekly Euro, advisers in the second round are Credit Suisse, JPMorgan, Merrill Lynch, Morgan Stanley and Rothschild.

- Bibiána Duhárová

BOHEMIAN CRYSTAL

The largest glass and porcelain group in the Czech Republic and the 10th largest producer in the world, Bohemia Crystalex Trading Group, was the past year's biggest bankruptcy. After troubles that began nearly a decade ago, the company's finances finally unraveled in September. The bankruptcy was initially held up as the first Czech victim of a world financial crisis and strong crown, the same woes facing every export-oriented business. At one point employing 7,000 workers in 14 plants in the Czech Republic alone, the company laid off 1,700 people, prompting the state to establish an alternative welfare office to handle the surge in applicants.

The undoing of Crystalex began in the '90s when it was privatized and bought by the biggest Czech bank at the time, the Investment and Postal Bank (IPB). IPB had a spectacular collapse in 2000, the biggest company to fall in the history of the country's free economy. Karel Souček and Radovan Květ took over part of the company's operations and the state took on the remaining IPB stocks. When the IPB mess was cleared, Bohemia Crystalex Trading Group was left with 6 billion Kč in debts and managed to pay off only a quarter by the time it collapsed in September. The first red flags were raised when major electricity supplier ČEZ cut off electricity to Crystalex plants for one week in late September. After that, it was a matter of days before employees were put on forced leave and the company entered bankruptcy proceedings under the new Insolvency Law that went into effect in January.

Souček and Květ turned to the state, hoping for a bailout, but the government refused to intervene under the market economy and said it would be unfair to taxpayers and competition. The first plants to fold were Sklo Bohemia Světlá nad Sázavou and Sklárny Bohemia Poděbrady, declared bankrupt Oct. 14. Those two closings affected 1,500 workers. Crystalex Nový Bor (1733 employees) and Kavalier Sázava (1,285 employees) are currently under moratorium until the end of December. The company has until then to prove viable to the court or face bankruptcy. Bohemia Crystalex Trading has agreed with unions that wages that will not be increased next year.

"Creditors, insolvency administrators and consultants from PricewaterhouseCoopers are now negotiating further proceedings, concentrating mainly on the timeline of the sale of bankrupt operations," said Karel Samec, the group's spokesman. Fifteen investors have shown interest.

- Bibiána Duhárová

CZECH EXPORTS

Czech exporters, facing one of the worst years on record, began to receive increased aid in October in the form of long-term loans from the Czech Export Bank and the Industry and Trade Ministry, but such efforts have done little to mitigate the problems facing the ailing industry.

The 2.9 billion Kč loan package - targeted at companies exporting to Asia and Russia - was planned as a way to encourage Czech exporters to look beyond the struggling euro zone, and thus repair some of the damage done to profits by the strength of the Czech crown and the more recent credit crunch. A spokesman for the Export Guarantee and Insurance Corporation (EGAP) which is administering the loans, pointed to the necessity of expanding the current market.

"It's time to look to new markets, and we are offering help," Vlastimil Necesta said shortly after the plan was announced. "We believe investing [outside the European Union] is the best way to reach new markets."

It is still too early to tell how effective such aid will be. Many companies - such as Crystalex - are too debt-laden to contemplate shifting markets and have already closed their doors. Others, such as Škoda Auto, have curtailed production and laid off hundreds of workers.

"It's been a difficult year for all Czech exporters, and many companies are facing serious losses," said Karel Potměšil, an analyst at Cyrus.

The year 2008 proved to be one of the most difficult ever for Czech exporters, who saw prices fall due to the strength of the crown. The Czech currency, which rose steadily throughout the year, reached a peak of 23 Kč to the euro in June. As the crown began to weaken and the Czech National Bank promoted a return to "normal growth," exporters breathed a momentary sigh of relief, thinking that the worst was behind them.

"The Czech economy is past the peak of the economic cycle and so is slowing down," ČNB governor Zdeněk Tůma told the daily Hospodařské noviny Aug. 29.

But the catastrophe that struck Wall Street in early September quickly sent shockwaves throughout Europe and Czech exporters, most of whom target the EU almost exclusively, were forced to recognize that the outlook for next year offers little hope. Analysts predict a deep recession across the euro zone for most of 2009, a prognosis that will undoubtedly take its toll on exporters.

"The first half of next year will be hard in the Czech Republic," Potměšil said.

- Stephan Delbos

RUNAWAY CROWN

In July, the crown was cresting after a year's worth of almost runaway growth that had exporters in a fit over snowballing losses and the Czech National Bank (ČNB) nervously eyeing their inflation targets. The currency hit records against both the euro and the dollar, breaking through the 15 Kč benchmark against the dollar on July 3 and the 23 Kč one against the euro on July 18. While the exchange rate was a boon to Czechs traveling during the summer months, it was damaging to exporters, who make up 85 percent of the Czech economy. Those losses incited exporters to strengthen their demand that the government set a date for euro entry, a call that has continued to go unheeded by the government.

On Dec. 16, the government acted on the recommendations of Finance Minister Miroslav Kalousek and ČNB Governor Zdeněk Tůma and declined to set a date for eurozone entry, ruling out the possibility that the Czech Republic would enter the exchange rate mechanism (ERM II) that must precede euro adoption in 2009. The Bank and Finance Ministry said that while the economy is becoming more aligned with the eurozone's, the current crisis has complicated any talks of joining the euro.

"In these conditions, the outlook for meeting the Maastricht convergence criteria and mainly maintaining and raising the level of achieved convergence of the Czech economy with the eurozone is highly uncertain," the ČNB said in a press release.

That uncertainty was evident in the behavior of the Czech currency following this summer's highs as initial weakening was quickly exacerbated by the banking crisis that first hit the United States and then Europe in September and October. By the end of October, the crown had weakened to 20 Kč to the dollar and 25 Kč to the euro, a significant decline.

That volatility puts the crown out of range of the ERM II's limit for currency swings, which must be within plus or minus 15 percent, according to the ČNB.

ČNB board members even said the recent economic slowdown in the Czech Republic was staunched by the independent currency, and board member Vladimír Tomšík told Patria.cz Dec. 8 that euro adoption would have done nothing to prevent the crisis.

"The existence of our own currency and own monetary policy has helped us stay protected from direct exposure to the financial crisis," he said.

- Claire Compton