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November 20th, 2008
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Banking crisis hits EU markets

Finance minister says banks are safe as bourse plummets

By Claire Compton
Staff Writer, The Prague Post
October 8th, 2008 issue

The U.S. financial crisis finally hit Europe as governments scrambled this week to mitigate a financial free fall with banking rescues and pledges to guarantee bank deposits. The fallout came despite last Friday’s $700 billion (12.5 trillion Kč) bailout by the U.S. government, and Europe’s efforts so far to reassure markets have also failed as stock exchanges fell spectacularly Oct. 6.
The Prague Stock Exchange plummeted 8.46 percent Oct. 6, the bourse’s worst hit since it was established in 1993. But analysts in the Czech Republic said the drop was only a gut reaction to the news.
“It’s more of a psychological process than a rational one,” said Petr Sklenář, chief economist at Atlantik FT.
Effects on the Czech Republic would be indirect if trade falls off from neighbors directly hit by the crisis, Sklenář said, since half of industry is export-based.
“This is the main risk to the Czech economy at this point,” he said.
As the governments of Ireland, Germany, Sweden, Denmark and Austria all promised to guarantee bank deposits, Czech Finance Minister Miroslav Kalousek denounced the strategy as impossible and said he would seek time limits on the guarantees at a meeting of EU Finance Ministers Oct. 7.
Countries making that promise could cause a flight of customers from countries that don’t offer the same guarantees, he added.
“European governments that provide political guarantees for all deposits are very irresponsibly motivating people to transfer their deposits from one country to another,” Kalousek told the Czech News Agency.
Guaranteeing deposits in the Czech Republic would mean very little, given the country’s current bank structure that covers most accounts, Sklenář said.
“If the government guaranteed 100 percent of deposits, I think it would be more of a political gesture than having any significant impact on deposits,” he said.
The government may raise the deposit insurance on bank accounts, and Kalousek said he would accept a doubling of the current limit, and banks are expected to lobby for a raise since it would put Czech banks at a competitive disadvantage.
The Czech Republic’s banking industry may become a model of how the crisis could have been avoided, as a history of cautious investments and loans means the industry won’t fall victim to the bankruptcies that have rocked other countries.
“The Czech banking system has not invested in risky or toxic assets, because investment banking does not really exist here,” Sklenář said. “Czech banks also have enough deposits and sources to finance their own activities, [compared with] the banks in Western Europe and the United States that needed to borrow money from other banks.”

Claire Compton can be reached at ccompton@praguepost.com


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