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After World War II, Czechoslovakia fell within the Soviet sphere of influence. In 1968, an invasion by Warsaw Pact troops ended the efforts of the country's leaders to liberalize party rule and create "socialism with a human face." Anti-Soviet demonstrations the following year ushered in a period of harsh repression. With the collapse of Soviet authority in 1989, Czechoslovakia regained its freedom through a peaceful "Velvet Revolution." On 1 January 1993, the country underwent a "velvet divorce" into its two national components, the Czech Republic and Slovakia. Now a member of NATO, the Czech Republic has moved toward integration in world markets, a development that poses both opportunities and risks. 

Update No: 072 - (17/04/03)

The Czech Republic is in the throes of a major political crisis, which debouches onto a serious geopolitical conundrum and a climacteric in the fiscal policy of its government. Troubles are not coming singly.

Fragile coalition government
The fragile three-point coalition government, led by Premier Vladimir Spidla, has been paralysed this year by persistent factional in-fighting within its dominant member, the Social Democrats, also led by the premier. It only survived a no-confidence challenge to its continuation by a single vote in parliament in late March. This was followed by a leadership challenge at the party congress at the end of March.
This comes after a victory in parliamentary elections last summer which seemed to assure the coalition four years in government. Former leader of the Social Democrats, Milos Zeman, stepped down from the premiership and party leadership to allow Spidla a free run. But Spidla did not reciprocate by backing Zeman for elections to the presidency in December and earlier this year, allowing his old conservative foe, Vaclav Klaus, to beat off challenges to him succeeding Vaclav Havel as president. Klaus only won by one vote and included among those voting for him were certain Social Democrats disaffected with Spidla. Klaus, installed since February, is almost certainly waiting his moment to call for a new premier and party to form a fresh government, after early elections which look increasingly on the cards.

Crisis in Iraq
The government has been agonising over the Iraq war. Havel signed the eight-nation letter supporting Bush's coming war, which was dramatically sprung on the world in February. Along with a similar declaration by the Vilnius 10, it split Europe right down the middle and provoked Chirac into his notorious outburst that "certain countries have not done themselves a favour in their negotiations for EU accession." The Czech Republic is due for entry, along with other Visegrad nations, who were signatories of the eight-nation pro-war letter, together with EU members, the UK, Spain, Italy and Denmark.
By linking the question of EU entry to foreign policy issues Chirac has certainly succeeded in muddying the waters. Actually Havel's stand, taken as an elected president, was not at all popular. The Czechs, and the Slovaks, have differed from the Poles and the Baltic states (also due for inclusion in the EU in June 2004) in that they are fundamentally hostile to the US and the UK over their war in Iraq, which they would rather designate a "war on Iraq."
Klaus has expressed himself as lukewarm about the war, far from being convinced of its present necessity. It is not that he thinks that there was not necessarily a legal case for a war, but not for one now before UN inspectors had been given more time to do their job, exactly the position of the French government, as it so happens, which did sign up to UN Resolution 1441 authorising "serious consequences" if Iraq did not comply "within thirty days." Clearly Klaus agrees with Chirac and Schroeder that those "serious consequences" should not yet have included war, only more exhaustive inspections. Prague has thereby helped mend its fences with Paris. 
But the general public, for all its opposition to war, did not take to Chirac dressing down Havel and his co-signatories over the issue. They were already apprehensive about the loss of sovereignty involved in EU membership and the controversy has not assisted the government in its attempt to win a majority to support EU entry in a coming referendum in June.

EU-budget problems mount
The run up to EU accession is coming at a time of mounting pressures on the budget, which is due to be in deficit to the tune of 6.3% of GDP this year, according to the finance ministry, headed by the young reformer, Bohuslav Sobotka. Without reform it will stand at 6.6% of GDP in 2006, the last date that the next parliamentary elections can be held and also the date tentatively considered for Czech accession to Euroland, which would require the budget deficit to be below 3% of GDP. The requirements of domestic politics are here dashing violently with those of becoming a full EU member.
For 82% of state spending, the core of the budget goes on social transfers, pensions above all, which can only be reduced by legal amendment. Despite the urgent need for reform, it is clear that the government will wait until after the EU referendum in June to take on board the short-term budget reform proposals put forward by Sobotka in December. "Spidla believes we should not upset our voters too much before the EU referendum," says Jan Mladek, a social Democrat deputy who is a key figure in Sobotka's advisory team.
But even if the referendum is won, which is still, despite everything, likely to happen, that will not end the coalition's troubles. It only has a majority of two in parliament and is far from being well - placed to reach a compromise on fiscal reform afterwards.
Spidla will remain under pressure not to abandon his manifesto spending promises, while his centre-right coalition partners will feel even less constrained about leaving the government if there is no reform.
"The government will not survive the next budget vote," says Social Democrat Senator, Richard Galbr. "There will be early elections and we'll lose them." 
Even if the government does survive, by delaying discussing fiscal reforms until the end of June, there will be little time to make the legislative changes required to include them in the 2004 budget, which is put together in September.
Spidla accepts that the deficits are unsustainable in the long term, but he has consistently opposed real reform of the increasingly loss-making pension system. His precarious political position now gives him an added reason to postpone real budget reform until after the 2006 election.
The government knows it can afford to put off a decision because public debt is still relatively low and local banks remain content to finance the deficits.
"The government is like a man falling out of a window," says Mr Hanousek. "It knows the crunch is coming but it is saying 'so far, so good'."

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Brno-Prague air link in jeopardy after city council votes to end aid

Czech Airlines (CSA) flights between Brno and Prague could soon be terminated after a decision by Brno City Council recently to end support for the struggling route, the Prague Business Journal reported.
The airline didn't know how to react to the news. "It is premature to speculate what will happen because we don't have an official announcement yet," said CSA spokesman, Dan Plovajko. He admitted, however, that the airline was surprised by the council's decision.
The city gave no advance notice that it was considering ending its support, which currently amounts to around Kc 8m a year, or around Kc 57,000 per flight. The city is currently contracted to subsidise the route until October, but council members want to stop council support at the start of April.
Brno chief magistrate, Petr Duchon, said that the town hall and Brno fairs and exhibitions organiser, Veletrhy Brno, which also helps support the route, will negotiate with CSA on what the future prospects for the route could be. Veletrhy guarantees to purchase seats on every flight to the tune of about Kc 25,000 a flight.
Last year about 4,500 passengers travelled on the route, according to Tomas Placek, director of Letiste Brno, the company that operates Brno-Turany airport. That's an average of about 14 people per flight. "The route would need at least double that number of passengers to earn its living without subsidies," Placek said. A round-trip ticket costs about Kc 5,000.
A report by Brno City Hall said the route continues to make a loss and has shown no sign of winning more passengers since its launch in November 2000. Brno deputies also dislike the timetable of the current flights.
CSA also faces new competition in the form of a new bus shuttle service launched in mid-February by Brno-based travel agency Dusek Tours in cooperation with Slovak low-cost air carrier SkyEurope Airlines, carrying passengers from the Moravian capital to international airports in Vienna and Bratislava. The shuttle fare is include in the price of the airline ticket.
However, even if CSA stops operating the Brno-Prague route, the Moravian capital may not be without air connections for long. Letiste Brno wants to establish regular flights between Brno and the town of Beauvais, near Paris, next year. It wants to find a carrier that could offer at least three round-trip flights a week. "We count on tourists from Western Europe and businessmen using the flights," Placek said.
In spite of their move to end support for flights to Prague, Brno city councillors said they would like CSA to launch services from Brno to other cities.

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UB crisis sets bank rumour mill in motion

Several of the Czech Republic's largest banks have been beset by rumours about poor liquidity and, in some cases, their imminent failure, since the Czech National Bank's (CNB) February 21st decision to launch administrative proceedings to revoke Union Banka's (UB) licence, The Prague Business Journal reported.
Komercni Banka (KB), Ceskoslovenska Obchodni Banka (CSOB) and one of the smaller banks on the market, eBanka, have been the subject of rumours circulated via e-mail, SMS or Internet. HVB Czech Republic, the Czech arm of Germany's HVB Group, has also been the focus of rumours.
HVB Group, Germany's second-largest bank, recently announced worse-than-expected results for 2002, posting a loss of €858m due to high provisions for bad loans and charges for its revamping program, which involves cutting 9,100 jobs. The bank has so far not confirmed recent rumours that it intends to cut a further 1,000 jobs in 2003 to avoid a second year in the red.
KB, on the other hand, recently announced preliminary results for 2002 that showed an unconsolidated net profit of Kc 8.76bn, some 246% higher than 2001.
Disgruntled former bank employees, UB clients and even practical jokers have been blamed for the false reports, but the banks were quick to rule out that competitors could be responsible. And while representatives of the affected banks said the rumours had so far caused little actual damage, they said they could re-activate the fears and emotions of the Czech bank banking sector crisis of the mid-1990s. But observers said that a run on a major bank in the Czech Republic was unlikely, as the banks are all foreign-owned.
Ebanka was the subject of the first flurry of rumours. Over the course of the last week in February, following the closure of all of UB's 91 ranches, an e-mail was circulated claiming "eBanka may go bankrupt … apparently they have no money … this information is from someone in the banking sector." The e-mail spread and its contents later placed on several Web sites.
The impact of the e-mail on bank deposits was negligible, said eBanka spokesman, Pavel Makovsky, but the management felt it necessary to issue a press release as soon as it became aware of the email's existence. "Luckily, our clients tend to be pretty well educated and understand how easy it is to spread rumours on the Internet," he said. "We've actually received messages of support and offers of help from some clients."
In the week after the UB crisis hit, rumours also circulated about HVB and KB. Although press officers were unavailable to comment, sources close to both banks said that the rumours had merely caused them inconvenience rather than any real difficulty.
Recently it was CSOB's turn, but the SMS-circulated rumour was confined mostly to Moravia and the Plzen region. The messages warned that CSOB had low liquidity and would have it licence removed by the central bank on March 10th. CSOB is owned by Belgian bank KBC, and bank representatives said the rumours were comical.
Theories abound about the bank rumour epidemic. "Since the privatisation of the main Czech banks, restructuring plans have been implemented in which relatively large numbers of excess staff have been made redundant," said Andrczej Nowaczek, a banking analyst at Credit Suisse First Boston in London. "It is entirely possible that some if not many of these people bear a grudge and would be quite happy to use any opportunity to hurt their former employers."
The other theory behind the rumour epidemic is linked directly to the problems at Union Banka. "This could be any one of the clients at (UB) that will not get all of their money back from the bank" and who wants those not affected by the UB crisis to share the misery, said one banking source who spoke on condition of anonymity. 
Czech bank clients have up to €25,000 of their deposits insured and will receive 90% back from the Insured Deposit Fund. Those with more money deposited will not receive any more
Observers maintain there is little to be worried about. "With the vast majority of the Czech banking sector in foreign hands, it's hard to see rumours causing a major run on a bank," Nowaczek said. "There could be a limited run based on rumours, but I'd be interested to see what the knock-on effects of a major Western bank getting into trouble would have on consumer confidence in the region.

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Details of merger between Czech power generators and distributors 

Energy producer CEZ [Czech Power Plants] will become bigger next on 1st April by incorporating eight regional distribution companies and will thus become one of the largest companies in the country, Mlada fronta Dnes web site has reported. This is the largest financial transaction in the domestic economy in the last few years. CEZ will acquire the shares in the power suppliers for a total of 32bn korunas. 
However, on the same day it will transfer to the state a 66 per cent block of shares in its CEPS subsidiary, which owns the strategic system of transmission networks. The value of that stake is 15bn korunas. The state will get in total 21bn korunas. The difference between the two transactions is 17bn korunas in its favour, and in addition CEZ will pay 4bn [korunas] in taxes from the transaction. 
"We have an agreed payment timetable with the government. We will send 2bn korunas immediately and another 4bn korunas in the middle of the year," said CEZ boss Jaroslav Mil. The state should then receive additional money gradually up until 2006. 
According to the decision of the Antimonopoly Office, CEZ will have to sell in the near future minority stakes in three distribution companies and one newly acquired majority stake...
The verdict of the Antimonopoly Office also requires CEZ to get rid of its remaining 34-per-cent stake in CEPS. However, neither CEZ nor the Antimonopoly Office has published the dates by which the sale should take place. "We cannot say because purchasers could use the time limits to pressure us in negotiations," said Mil...

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Top steel maker: only LNM can buy Vitkovice

A top manager at one of the world's biggest steel companies warned recently that the Czech government has made a competitive sale of Vitkovice Steel all but impossible because of the way it has already structured the privatisation of Nova Hut, renamed Ispat-Nova Hut at the start of March.
John H Goodish, executive vice president of United States Steel Corporation (US Steel), said recently at the CRU 9th World Steel Conference in Prague that the government now has no choice but to sell Vitkovice Steel to LNM Holdings, the new owner of the country's biggest steel maker Ispat-Nova Hut. The implication is that the government will also have to accept the price that LNM offers, the Prague Business Journal reported.
Goodish said the government took a fatal step by depriving Vitkovice Steel of an independent source of raw steel as it prepared the sector for sale. That means that it has to rely on near neighbour Ispat-Nova Hut for supplies.
"The government have put themselves in a cul-de-sac now," Goodish said, adding that the problem began when government holding company Osinek bought Vitkovice Steel. "We warned them at eh time but they didn't listen," Goodish said. "Now the only company for whom Vitkovice has any value is Ispat (the parent company of LNM holdings). They created this problem. Now they will have to solve it."
US Steel was once interested in buying into the state-owned Czech steel sector but has now shifted its attention to the ongoing privatisation of the Polish state-owned steel sector. Goodish said it is not interested in Vitkovice Steel anymore.
The government refused to sell Vitkovice Steel to LNM Holdings at the beginning of the year after describing its offer, a lot less than that paid by Osinek about a year earlier, as insufficient. It gave LNM Holdings six months' exclusivity to look into the books of the country's second-biggest steel maker before the decision to call off the deal.
The government has since said that Vitkovice Steel is functioning well and that a new attempt to sell the company is not a priority. Vitkovice Steel posted a preliminary 2002 gross profit of Kc 4.5m earlier in March.
The Ministry of Industry and Trade was unable to supply any information about Vitkovice Steel's supplies of raw steel and whether and in what way they are guaranteed under the Nova Hut privatisation contract.
Delegates at the conference were warned that only large-scale purchases of steel by China are saving the international steel sector from a slump. However, with China rapidly building up its own steel production capacity, it could within a few years turn into a net exporter of steel products.

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EIB funding helps repair Prague metro network

The city of Prague will be starting repairs on the metro network shortly, New Europe reports. Prague will receive a loan of €80m from the European Investment Bank (EIB). The metro stations and tunnels were severely damaged by the flooding that occurred in the summer of 2002. Many things are due for repair, such as escalators, safety equipment, and cleaning up of the stations. Officials said that after about seven months of work the stations will be ready for operation once again.
Since 1993, €3.8bn has been lent to Czech projects. The bank has funded many projects such as repair work for transport infrastructures, environmental and energy industries and rail and road. The EIB has adapted a new bank policy and this bank policy is going to be one of the first loans under the new bank policy, which is completely unconstrained of third party guarantees.
EIB funds were not soley going only to repairs but also to the expansion of Trans European Network corridors. There are about 20 kilometres of tunnels and 17 metro stations to be partly financed by the EIB Loan.

The great D8 highway debate

While completion of the D8 highway was set for 2005, protests by environmental activists have already pushed it back to 2006, Prague Business Journal has reported. Now, environmentalists say the 92-km highway, connecting Prague via Usti nad Labem to the German border, where it would connect to Germany's A17 to Dresden, will not be completed before 2007.
And it may not just be boasting. Martina Vapenikova, spokeswoman for the road's contractor and investor, the Road and Motorway Directorate of the Czech Republic (RSD), said that if the environmentalists succeed the construction could be delayed by up to four years because all the approvals and documentation so far submitted in connection with the project would lose their validity.
One of the most problematic sections of the road - over the Krusne Hory Mountains - has already been solved. At issue is the 16.4 km section between Lovosice and Rehlovice, which goes through Ceske Stredohori, a protected area of countryside.
Normally, it would be impossible to build in the protected area, but in 2001 Environmental Minister, Milos Kuzvart, granted an exception to allow the project to proceed. Environmental group, Deti Zeme, asked current Environmental Minister, Libor Ambrozek, (KDU-CSL) to examine the impact of the highway on the environment, according to Miroslav Patrik, deputy chairman of Deti Zeme. He said the group asked the ministry to withdraw the exception, and it proposed construction of a 3.5 km tunnel, which would protect at least part of the countryside.
Patrik has been dealing with the D8 controversy for 10 years. He claims that the road's construction violates the law on the protection of nature and countryside.
For their part, RSD officials claim that they have been working for eight years on their version of the road and that the time has passed for the group to block a project "in the public interest." Ambrozek said Deti Zeme's demands will kick off an appeals process that could last as long as a year.
Similar conflicts with environmentalists have also blocked the construction of highway D11 (Prague-Hradec Kralove-Polish border). The construction stopped 15 years ago near Podebrady, and still has not re-started.

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