Can the Czech Republic weather the current financial storm?

Photo: CTK

It's hard to pick up a newspaper anywhere these days without reading about the global economic meltdown precipitated by the collapse of a number of US banks, which has sent shockwaves across the globe. Remarkably, the Czech Republic and Central Europe seem to be relatively insulated from the crisis.

Photo: CTK
Although stock markets have fallen here, many experts have described this as a simple gut reaction to the chaos elsewhere and they believe that they will bounce back in time. So far, the Czech Republic also seems to be immune to the so-called “credit crunch” that has caused panic in business communities around the world. Some international commentators have even gone so far as to describe the country as a “safe haven” from the storm that is engulfing the world’s markets.

Aleš Michl
This is a view that is tentatively shared by most local economists. Aleš Michl is an analyst with Raiffeisenbank:

“I would say that the Czech economy is in a totally stable position right now, but there is a risk of recession. This risk is very low at the moment, but it’s still a risk. We will have to see how things turn out because right now we are living in a crisis that nobody has had any experience of. In my entire life, I have never seen those things I’ve been seeing on my computer the past two months.

“Consequently, it’s very hard to predict anything for the future. But I share the opinion that our Czech economy will be stable, or at least our banking sector will be stable because we don’t have the same problem with bad investments.”

Czech banks do seem to be in a much healthier position than their foreign counterparts, particularly US banks, who gave mortgages to people with weak credit ratings in the belief that rising real estate prices would enable them to easily remortgage their properties in the event that they ran into trouble.

A rise in interest rates and a crash in house prices, however, soon meant that many of these risky lenders have since defaulted on their mortgages and banks have had to write off billions of dollars of losses.

This has sent many banks to the wall and left others strapped for cash and unwilling to provide further loans, which has affected many businesses who often depend on credit and overdraft facilities to maintain cash flow.

But this credit crisis has not occurred in the Czech Republic, mainly because the country’s banking sector experienced something similar ten years ago and has since learnt its lesson. Tomáš Sedláček is a leading economic analyst with the Czechoslovak Commercial Bank:

“Well our banking system is much more conservative than that of Western Europe and America. Czech banking systems seemed to have learned a painful lesson from the late 1990s, when banks lent very freely to corporations. Czech banks were burned very severely by that. They had to be bailed out in the late 1990s by the government and since then they have truly learned their lesson.

“Now, ten years later, we are observing a similar situation between Western banks and households instead of corporations. So it seems American and Western banks have now made a similar mistake to the one we made.”

Nevertheless, despite the fact that the country’s banking sector seems to be secure, most economists accept that some sort of downturn in the Czech economy is still inevitable.

As cash becomes scarce elsewhere, Aleš Michl thinks there is bound to be a decline in direct foreign investment in the Czech Republic, which has been the main driving force in the growth of the local economy in recent years:

“I would expect that GDP growth in the euro zone will be close to zero in the next twelve, or possibly more, months. If they go down, then we will have to go down as well. We won’t go below zero, but I think our GDP growth will slow down from 6% to 3%.”

Miroslav Kalousek,  photo: CTK
GDP growth of around 3%, however, is still relatively healthy and no cause for panic. The Czech finance minister Miroslav Kalousek himself has stressed that the country’s economy is in decent shape.

He says that a slight decline in economic growth” doesn’t mean that the Czech Republic will not get richer … only that we’ll get richer slower than we’re accustomed to.”

This is an opinion shared by Tomáš Sedláček:

“I think Mr Kalousek put it very well. The extraordinary times of getting rich are gone. We’re now getting to a more normal state of affairs, so to speak. In a way, I think this is a good thing. It’s been too hectic. If this situation of 6% GDP growth a year were to continue for a few more years, I would be very much afraid of being burnt out or running too much over capacity. What we’re going through now is healthy. Every economy on the face of the earth throughout history goes through good times and bad times. If our bad times are to be 3% or 4% growth then ‘Hallelujah’ that’s still good news.”

Unlike the situation in other countries, the Czech regulatory authorities have so far deemed it unnecessary to take steps like guaranteeing bank deposits or reducing interest rates to bolster confidence in the local economy.

Ales Michl also thinks such interventionist measures are unnecessary at the moment:

“The problems in the United States are much deeper than they are in the euro zone, and the problems in the euro zone are much deeper than they are in the Czech Republic. Consequently, the monetary policy of the Czech National Bank can diverge from that of the European Central Bank.

“Right now, I expect that the Czech National Bank has the time to wait and see. This is a good strategy, because nobody knows what will happen in the coming months. I have never seen a crisis like this. Nobody has any experience of such huge turmoil.”

Tomáš Sedláček also thinks a laissez-faire approach is the best option for Czech financial regulators at the moment, and that they are right to avoid any knee-jerk reactions to the global economic crisis:

“We live in a time where rationality has been traded in for irrationality. The things that are happening now are not going according to expectations. It’s very difficult to say what will happen once you have a system that’s in panic.

“In the Czech Republic, we don’t have that. We aren’t seeing a rising level of panic. To a large extent, one can say that the nation that does not panic wins. The nation that succumbs to panic loses this game. And it is up to us whether we will behave rationally or irrationally.”

If the Czech Republic manages to weather the current storm, Sedláček says the country could actually benefit from the situation in the long run and help complete its post-communist transformation to a "Western-standard" market economy:

“The whole world will slow down and so will Central and Eastern Europe but not as much, so this is a good time to catch up in growth with the West, so to speak.”