American GI Pilsen
Two Way Street? American GI’s in Pilsen. May, 1945. One of the many ironies related to the ongoing (mis)treatment of the mostly American bondholders is that America has consistently been one of Czechoslovakia’s staunchest allies. From the ‘Washington Declaration’ of Czechoslovakian Independence in October 1918, through the subscription for the Czechoslovak State loan in 1922, the liberation of Czechoslovakia in 1945, and the build-up to the ‘Velvet Revolution’ of 1989, and thereafter, the American people have been there. But has the support just been one way? Photo:

Does Czech Government Owe Money to U.S. Citizens?

in Opinion

The Czech Republic’s 100 Year ‘Integrity Test’

As we head towards the 100th Anniversary of the foundation of Czechoslovakia, on October 28th, we will no doubt witness politicians in both the Czech and Slovak Republics seek to evoke the memories of the country’s first President; Tomas Garrigue Masaryk, his son; Jan Masaryk, and second President; Edvard Benes. These men epitomised the principles upon which the new republic was founded, namely: democracy, decency and fair dealing. Principles many modern day politicians say they represent.

However, in a strange twist of fate, the founding fathers of the republic would appear to have left a very fitting ‘integrity test’ for the current Czech and Slovak Republics. Namely, a valid unpaid debt, so embarrassing, few government officials wish to acknowledge. A debt that should have been repaid in 1987 if it hadn’t been for some small-minded skulduggery by both the Communist and Post-Communist Ministry of Finance.

What follows is the sequence of events which led to this strange situation.

The 1922 Czechoslovak State Loan

Almost immediately after Czechoslovakia’s independence, in late-1918, work began on the issue of a foreign denominated loan in the name of the new republic. Not only would this bring badly needed foreign currency into the country, but it would also represent international recognition for Czechoslovakia in the financial markets.

Czechoslovak State Loan 3
The Czechoslovak State Loan of 1922. The Czechoslovak State Loan represented international recognition for the republic. The illustrated bond is almost identical to one shown on the Czech National Bank (CNB) website. Apart from conducting monetary policy, the CNB is the supervisory body of the Czech capital market (and therefore responsible for investor protection). It also acts as the current paying agent for the Czech Ministry of Finance (MoF). It is ironic, therefore, that the bond shown on the CNB website would also appear to be one of the bonds which were never repaid. The stamp of consent and eligibility to the 1984/6 Settlement is clearly visible on the bottom right hand side of the bond. However, if the bond had been repaid, it would have had cancellation holes stamped on the bond to signify it is no longer a valid debt. Illustration Source: Author’s private collection.

The President, the President’s Son, Prime Minister, Parliament, and Ministry of Finance all Support the Loan

So important was the Czechoslovak bond issue deemed to the financial stability of the country that the Czechoslovak State Loan was personally negotiated by the then Prime Minister; Edvard Benes, and the President’s son; Jan Masaryk (who spoke fluent English, thanks to having an American mother). In a personal touch, Prime Minister Benes even signed a letter verifying key economic facts related to the new republic. This letter could be viewed by potential investors along with the prospectus. But the high-level endorsement didn’t end there. There is also evidence of at least one ‘strictly secret’ meeting between President Masaryk and Sir Peter Bark, of the Anglo-Czechoslovak Bank (indirectly controlled by the Bank of England), where the issuance of a further tranche of these bonds was discussed.

To further allay investors’ fears, the Czechoslovak government pledged assets against the loan; including the profits from the tobacco monopoly. These pledges carried the ‘’assurance of the Czechoslovak Ministry of Finance’’ (MoF) and were backed-up by a special act of parliament. It is probably true to say, never in the last 100 years did the Czechoslovak Republic, or successor states, issue such a ‘gold plated’ IOU.

Edvard Benes
Czechoslovakia’s political elite negotiated the Czechoslovak State Loan. Prime Minister Edvard Benes and President’s son, Jan Masaryk, photographed in 1922, the year of the Czechoslovak State Loan was successfully issued. In March 1948, Jan Masaryk was found dead after being thrown out of his bathroom window; most probably by Communist agents. In September, the same year, Edvard Benes died, a ‘broken man’, following the Communist Putsch. With their deaths died the two individuals most closely associated with the 1922 bond issue. With hindsight, along with the unfortunate Jan Masaryk, 1948 was the year principles of decency and, fair dealing was also ‘thrown out the window’.

Trailblazing Success

This work culminated in 1922, when the Czechoslovak State issued a dollar-denominated bond in New York, with a similar sterling denominated bond issued in London and Amsterdam. The Czechoslovak issue was a trailblazing success, being the first international bond offering from a central-European issuer since the end of WW1. The success of the Czechoslovak bond issue paved the way for not only for municipal and corporate bond issues from the City of Greater Prague (1922), City of Karlovy Vary (1924), First Bohemian Glass Works (1927), amongst others but also for bond issues from neighbouring countries. The surge of investment into Czechoslovakia propelled the economy higher. In the seven-year period between 1922 and 1929, the Czechoslovak economy expanded by a staggering 60%.

Economic growth index Czechia
The First Republic’s Belle Époque. The 1922 State Loan precipitated an influx of foreign investment into Czechoslovakia. While neighbouring countries experienced economic instability and social unrest, Czechoslovakia enjoyed a period of spectacular growth right up to the 1929 ‘Wall St Crash’. Data Source: The Czechoslovak Economy 1918-1980, Alice Teichova. 1988. Pages 18-19

So what’s the Twist?

Despite ‘Prague Castle’, The Prime Minister’s Office, Parliament and the MoF standing ‘shoulder-to-shoulder’ behind the 1922 bond issue, incredibly, a small number of these bonds remain an issue, the debt these certificates represent never being honoured.

The author of this article, a professional fund manager and scripophily enthusiast (the collection and study of historic stocks and bonds), has always been interested in why a small number of these bonds were never repaid, especially as those still in issue are often stamped as having ‘consented’ to the terms of a 1984/86 bond settlement between the Czechoslovak Ministry of Finance (MoF) and the Foreign Bondholders Protective Council (FBPC), an organisation representing the mainly American bondholders.

The 1952 Default and the 1984/86 Settlement

In 1946, immediately after the economic turmoil caused by WWII, the maturity of the Czechoslovak loan was extended and the government took over responsibility for the dollar bonds that had also been issued by the Cities of Prague and Carlsbad (Karlovy Vary). Then, in a seeming act of political spite, Communist Czechoslovakia defaulted on its dollar bonds in 1952, when just $2.7m was left outstanding, and on its Sterling debt in 1959; when only £240,000 was left outstanding. After direct intervention from the British Treasury, a settlement was quickly reached related to the sterling bonds. Unfortunately, for decades no progress was made with regards to the dollar bonds.

Eventually, in the 1980’s, the terms of a general diplomatic agreement were reached. In return for 18½ tons of gold which had been seized by the allies at the end of WW2, compensation was paid to 2,500 Americans who had lost property as a result of the communist takeover in 1948. As an annexe to this agreement, the Czechoslovak State agreed to negotiate with the FBPC for the outstanding dollar bonds. These negotiations were not unique, as the late 1980’s saw numerous settlements between defaulting countries (often Communist) and bondholders. The American FBPC was negotiating more than 50 such settlements and the British Council for the Corporation of Foreign Bondholders (CFB) negotiating many similar settlements.

Diplomatic Ineptitude Allows the Communists to Settle ‘Old Scores’

Despite Czechoslovakia having a history of serial default, on its dollar bonds in 1952 and sterling bonds in 1959, inexplicably, the US State Department returned all the gold before a bond settlement was finalised. Effectively throwing away the bondholders’ ‘trump card’. This reckless and much-criticised move left the FBPC to negotiate a bond settlement from a hopelessly weak bargaining position. A review of the archives, of the now inactive FBPC, shows that the Communist Czechoslovak government exploited the situation to the full. Despite, a headline Settlement figure representing 98% of the face value of the defaulted bonds (a not unusual settlement for the time), there was open discrimination:

  1. First to go: Despite being nationalised, at a meeting in Prague, FBPC representatives were surprised to find that the dollar bonds in the First Bohemian Glass Works (První česká akciová společnost pro výrobu skla) had ‘’inadvertently been omitted from the listing of Czech bonds’’.
  2. To compensate the Augstein family, who had had their properties nationalised, a New York State Court ruling forced two Czechoslovak state banks doing business in New York to sell dollar bonds in a judicial sale. ‘’Czechoslovakia recognises no further obligation to purchase these bonds from the speculators who purchased at the judicial sale or from the transferees of such speculators.’ These bonds were singled out for a reduced offer of just 20% of face value. As these bonds had been freely tradable on the New York Stock Exchange, and only the Czechoslovak MoF had the relevant serial numbers, it turned the settlement into a lottery. It also completely undermined the New York court’s decision.
  3. Czech émigrés were also excluded from the offer. During the inter-war period, using dollar-denominated bearer bonds would have been a very logical way for émigrés to transfer their wealth to America. A New York Times article reported officials saying: ‘’Bonds smuggled into the United States by Czechoslovak émigrés will also be disqualified.’’ The Czech American émigré community was vehemently anti-communist so, as with the Augstein bonds, the Communists used the weak bargaining position of the FBPC to settle another old-score.

Settlement turns into a ‘’Grandstand Farce’’

When it was realised how many bonds had been discriminated against, and others completely excluded, there was an uproar by the bondholders with the settlement being described as a ‘grandstand farce’. John Petty, President of the FBPC, responded that: ‘’ Once the gold was returned (over Council objections), the Czechs had little incentive to satisfy the Council’s demands.

American GI Pilsen
Two Way Street? American GI’s in Pilsen. May, 1945. One of the many ironies related to the ongoing (mis)treatment of the mostly American bondholders is that America has consistently been one of Czechoslovakia’s staunchest allies. From the ‘Washington Declaration’ of Czechoslovakian Independence in October 1918, through the subscription for the Czechoslovak State loan in 1922, the liberation of Czechoslovakia in 1945, and the build-up to the ‘Velvet Revolution’ of 1989, and thereafter, the American people have been there. But has the support just been one way? Photo:

From Bad to Worse – MOF Default (Again)

At this stage, probably the bondholders, and the American FBPC; which was negotiating on their behalf, didn’t think things could possibly get any worse.

Pending the announcement of the terms of the final settlement in 1986, under the 1984 Memorandum of Procedure, bondholders were recommended to submit their bonds to the Czechoslovak Government’s Paying Agent (Irving Trust, New York) who would receive the bonds, record their details, make an initial 2 ½% Payment on Account, stamp the bonds, and then return the bonds to the holders.

When the Final Settlement was announced in 1986, all those bonds that had received the 2 ½% payment on account, and duly stamped as accepting the offer, were eligible to receive an additional one-off payment representing 95.5% of their face value, bringing the total payment to 98% of the face value. Augstein bonds received no stamp but were entitled to receive a payment equal to 20% of their face value. To accept the offer, holders had to surrender their bonds to the paying agent (Irving Trust) between December, 29th 1986 and December 31st, 1987.

Returning to our original question: Why are many of these historic bonds, stamped as eligible for the additional payment, still in circulation? Unbelievably, it would appear that in 1987, the Czechoslovak MoF defaulted…yet again…this time on the Settlement!

In 1987: Evidence of Default on the Settlement itself!

The FBPC archives show correspondence, as at April, 29th, 1987, from the Czechoslovak Government’s Paying Agent, Irving Trust, indicating a problem funding the Agreement – ‘’We need more money’’ – Irving Trust wrote bluntly. Though the terms of the Final Settlement clearly committed the Czechoslovak Government to deposit additional funds, as shall be required, it appears that by June 1987, there was an estimated shortfall of $250,000. There is no evidence that payment was ever made, despite repeated requests. Remarkably, it would appear that Czechoslovakia under-funded the settlement and that’s why many bondholders were never paid. It is the only instance the author knows where there is evidence an FBPC Settlement was defaulted on.

Hands across the Atlantic
Hands across the Atlantic. When the underfunding of the 1986 Settlement became clear, John Petty, the President of the FBPC, pleaded with the Czechoslovak MoF to provide the additional funding pointing out: ‘’many of these bonds had been purchased by Americans of Czechoslovak origins who purchased these at their local churches or societies to support the Motherland’’. Left: A Bohemian Party in Chicago, 1910. Source: UIC

When this question was put by the author directly to the current Czech MOF: ‘’Was the 1984/1986 Settlement honoured?’’. The rather evasive response was: ‘’The American party accepted the offer, and an international agreement was signed’’. That sounds to the author like legal speak for: ‘’No, it wasn’t!’’

In 1989, ahead of the ‘Velvet Revolution’, Czechoslovakia Invokes ‘’Sovereign Immunity’’ to Avoid Claims

You will recall that those bondholders, who by unlucky chance held bonds that had been sold in the judicial sale to compensate the Augstein family (who had lost their property following the Communist takeover), had been particularly discriminated against in the agreement and offered only 20% of the face value of their bonds. When holders of the Augstein bonds tried to sue both the Czechoslovak State and FBPC in New York, the Czechoslovak State invoked sovereign immunity. As a consequence, the case against the FBPC also had to be dropped. The use of sovereign immunity left the bondholders with no means of legal redress.

Students of Czechoslovak history will note the use of sovereign immunity came just before the ‘Velvet Revolution’ in November 1989. One would have expected that with the change in the system a different attitude would have prevailed and the 1986 Settlement would, at last, have been fully funded and émigrés and other bondholders, who had been discriminated against, compensated. Remember, only an additional $¼m was needed to fund the Settlement! That rises to approximately $½m if the offer is broadened to include émigrés and the other bondholders who the Communists had discriminated against. But the post-Communist MoF didn’t make good on the agreement, even though doing so at that time would have required just $½m! How cheapskate can you get?

Post-Communist Era See’s Settlement ‘Written out of History’

Bondholders were expecting a different attitude, Post-Communism would be disappointed. From 1993 onwards, the Czech Republic, its agencies, and cities such as Prague were issuing bonds once again. In the accompanying prospectuses, no reference can be found to Czechoslovakia’s history of default, the recent 1986 bondholders’ Settlement, or the recent use of sovereign immunity to avoid bondholders’ claims. It was as if the bonds had never existed and a Bondholders’ Settlement never signed.

It was history repeating itself. In Joseph Wechsberg’s book, The Merchant Bankers, Sir Edward Reid, a banker at Barings, gave his recollections about the original Czechoslovak default and a visit he made to Prague to discuss the matter: ‘’Barings sent a letter and another one. No answer. It sent telegrams which remained unanswered too. Individuals act that way, but it is hard to believe that governments may behave like ill-mannered children. At last, Sir Edward Reid took a plane to Prague. There he stepped out into a strange, Kafka-esque world. He couldn’t find anyone in the bureaucratic labyrinths who knew or admitted to knowing anything about the 1922 State loan. The loan didn’t seem to exist. Maybe it had never existed.’’ Though these comments relate to a visit made in 1959, to discuss the sterling bond default, they could just as easily relate the post-Communist (1989) period and the 1986 Settlement.

What Settlement? What Default? Left, the original prospectus for the 1922 State Loan. Right, a more recent prospectus. Despite evidence to the contrary, in recent prospectuses no mention is made of a 1986 Settlement or a partial default (underfunding) of that Settlement in 1987. Furthermore, the use of Sovereign immunity in 1989 to avoid claims isn’t mentioned in recent prospectuses though assurances are given that ‘Sovereign immunity’ won’t be invoked. Source: New York Times, April 6th 1922, Bloomberg

2011: Questions asked about Karlovy Vary’s (Carlsbad’s) Dollar Debt

Some readers of this article will recall that, in 2011, controversial US activist Edward Fagan hit the headlines when he asked questions about the unpaid dollar debt of the City of Karlovy Vary (Carlsbad/Karlsbad). In fact, this debt, along with that of the Czechoslovak State Loan, and the City of Greater Prague, was also meant to have been repaid in 1987 as part of the Dollar Bond Settlement. According to Press reports from 2011, the Czech Ministry of Finance refused to authenticate the bonds nor disclose the terms of the 1986 Settlement. It was this evasive behaviour that first piqued this author’s interest to research the issue independently.

In the media frenzy that followed, the UK’s Daily Telegraph declared: ‘’ US lawyer’s campaign to cripple Czech village with £320m bill on bonds issued in 1924’’. But as we have seen, the whole issue of these and the other outstanding bonds could have been settled for just $½m in 1987. Even adding interest over the last 30 years doesn’t get anywhere near this figure. So where did this astronomic figure come from?


City of Carlsbad Loan (1924). The Cities of Carlsbad (Karlovy Vary) and Greater Prague had their dollar debt obligations taken over by the State in 1946. These bonds were also meant to be repaid in 1987 following the 1986 Settlement. The stamp of consent to the Settlement is clearly visible at the bottom of both bonds. Interestingly, The City of Greater Prague bond, has a Certificate of Registration under the Czech-Slovakia (Financial Claims and Refugees) Act 1940, indicating that the beneficial owner was a British as at 8th May, 1939. The money raised by these bond issues proved transformational to the infrastructure of both cities. While Karlovy Vary invested in ‘revenue producing projects’, Prague invested in its tram network and power stations. The Greater Prague bond bears the signature of Karel Baxa who dominated Prague municipal politics in the inter-war period. Illustrations: Author’s private collection.


It appears the confusion arose because the Karlovy Vary and other dollar bonds were backed by gold. When issued, yes, these dollar bonds were indeed linked to the price of gold. However, over the intervening period the world, including Czechoslovakia, abandoned the gold standard. The author knows of no FBPC or similar Settlement based on the gold standard. Furthermore, the ‘Sinking Funds’ attached to all these bond issues meant that, along with the interest payments, every year a proportion of the initial bond issue was repurchased. The bottom line being, as at June 1987, of the $33.75m of dollar bonds issued in the 1920’s, and subject to the later Settlement, by June 1987, less than $1.91m were outstanding. Of these, as of today, most have probably been lost. It should also be noted, apart from the Czechoslovak Loan, the outstanding dollar bonds were all issued by entities solely based in the modern day Czech rather than the Slovak Republic.

The Current Situation

The Czech Ministry of Finance (MoF) declined to respond to a request for comment on this article; just as they have also ignored requests by the author, and others, to validate bonds held or provide bondholders (or journalists) copies of the 1984/6 Settlement. Fortunately, a signed copy remains in the FBPC archives at Stanford University Libraries.

In the only previous correspondence received by the author, the MoF asserted: ‘’should the claims be governed not by Czech law but by the state of New York, where the bonds should have been redeemed, the statute of limitations for the bonds would be 6 or 20 years. Thus, the bonds would be barred by the statute of limitations in 1986 at the latest.’’ [A somewhat convenient date as it is still the Communist era]. MOF spokesman, Ondrej Jakob, in 2011, apparently told Czech media group CTK: ‘’the commitments have been statute-barred for dozens of years’’.

Strange, as for how can the Statute of limitations be in 1986 when a bondholder’s Settlement was agreed in 1986? Indeed, it can’t. According to an expert legal opinion received by the author, the 1986 Settlement: ‘’renewed the claim, in 1987… [when] owners of bonds were called to submit bonds, so the limitation period was prolonged…’’ By implication, well into the post-Communist era and the era of the current MoF. Possibly up to as recent as 2007. So why didn’t the post-Communist MoF honour the Settlement?

This legal opinion would also seem to be shared by the US State Department. In the archives of the now inactive FBPC, the FBPC were given a draft of a US State Department letter, dated June 9th, 1987, reminding the Czechoslovak State ‘’…the Government of Czechoslovakia is released only from claims relating to those bonds…for which acceptance of the offer is made.’’

That the Communist era MoF ‘did the dirty’ on bondholders: defaulting, discriminating against Czech émigrés, underfunding a bondholders’ settlement, and invoking sovereign immunity comes as no surprise. That is the post-Communist era, the MoF continued playing hardball and didn’t honour the settlement is a real disappointment. Furthermore, the current MoF’s argument doesn’t seem to question the validity of the debt. And what of this phrase: ‘’Statute Barred’’ …as if the Czech MoF is forbidden from repaying this debt? It merely means bondholders can no longer enforce payment, not that the money isn’t due to them. That’s the real test of integrity: Doing the right thing, regardless of whether you have to or not.

The 100 Year ‘Integrity’ Test

The history of the pre-war dollar debt is a classic example of the Czech ‘small-mindedness’ that both Tomas Garrigue Masaryk and Edvard Benes were trying to fight against.

Tomáš Garrigue Masaryk
‘’I was elected four times to be President of our Republic; Perhaps it gives me the legitimacy to ask you, and the whole nation Czechoslovakia, and fellow citizens of the other nations, to remember that states should maintain the ideals from which they were born. I’ve always been aware of it myself.’’ – Tomáš Garrigue Masaryk

The Socialist Czechoslovak Ministry of Finance (MoF) defaulted on the dollar tranche (in 1952); when just $2.7m was left outstanding, the sterling tranche (in 1959); when just £240,000 was left outstanding, and under-funded of the bondholders’ agreement (as at June 1987); when just additional $250,000 was required!

When the system changed in November 1989, the post-Communist MoF also failed to make good on the agreement or compensate the émigrés and others who had been discriminated against. The author estimates that at the time, a fair Settlement would have cost a mere $½m! Even today, even after adding some interest over the intervening years, the costs of honouring the Settlement wouldn’t be that great.

A repeated theme, in this undignified story, is the disbelief by investors and their representatives at the behaviour of the MoF; especially given that such trifling amounts are involved. The reputation of the country would appear not to have been a consideration. The sentiments of Sir Edward Reid, the Barings banker, probably reflect those of many: ‘’that the government of a once proud nation would risk the loss of its financial reputation for a paltry two hundred thousand pounds is…inconceivable to [Sir Edward Reid] the godson of King Edward VII.’’ Similarly, notes from a Sept., 23rd, 1982 meeting in Prague left the FBPC representative, a Mr Gray, with the impression: ‘’…the Finance Ministry is not negotiating with us … to show the world that the obligation of the Czech Government is sacred.’’

Ironically, the Czech MoF is the lead ministry in creating the legal framework for the Czech capital market. The Czech National Bank (CNB), the MoF’s current paying agent, acts as the capital market regulator/ supervisor. A recent report by the World Bank stressed ‘’the need to build trust and confidence’’ in the Czech capital market and ‘’ensure better information flow’’. It is difficult to see how failing to honour the 1986 Bondholders’ Settlement, and refusing to disclose the contents of that Settlement, has built trust and confidence in the Czech capital market? Furthermore, the MoF seems to have a problem acknowledging, what the archive evidence points to, namely that the Settlement was both highly discriminatory and that the MOF defaulted on it by underfunding the Settlement. This is the reason why these historic bonds remain in circulation and the debt they represent unpaid.

A Matter of Integrity

Due to the use of Sovereign immunity, administrative hurdles; such as failing to authenticate the bonds, the non-disclosure of the 1984/6 Settlement, and the inevitable passage of time past the statute of limitations (probably 2007), bondholders now have limited scope to enforce payment. Congratulations, the combination of these actions means that the Communist and Post-Communist MoF have avoided paying out to those patriots who, in many cases, bought these bonds ‘’to support the Motherland’’. These bonds stopped actively trading soon after the original default in 1952. That means, with no active marketplace, many of the surviving bonds will still be in the hands of those families who supported the new republic.

Contrary to what some government officials might like to believe, the debt remains valid and outstanding. It hasn’t magically ‘expired’ or ‘disappeared’! The continued non-payment of this historic debt, despite the 1986 Settlement, remains a matter of public record; as does the use of Sovereign immunity to avoid claims.

The institutions that supported the initial Czechoslovak loan, namely: the President’s, and Prime Minister’s Offices, Parliament and Ministry of Finance, should once again reunite to consider whether these bondholders/patriots have been treated honestly, fairly and decently. In other words, consistent with the values that the Czech Republic was founded on. The 100th Anniversary of the republic isn’t just a time for reflection; it should also be a time to re-connect with those values. That some of these historic bonds were never repaid therefore represents a unique and timely opportunity to reassert those values.

Jeremy Monk is a British national living and working in the Czech Republic.

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