Global financial turmoil to slow down Czech economy

The global financial crisis, fuelled by the recent fall of Wall Street’s number four investment bank Lehman Brothers, has already hit markets in Central and Eastern Europe. Although no bankruptcies of mortgage providers on the national level are expected, the Czech economy will face a slow down as a result.

Photo: CTK

The Prague stock exchange fell by just over four percent on Monday following the meltdown of the US and British financial markets. Then, on Tuesday, the shares of a Czech real estate developer stopped trading twice as their shares saw a dive of 27 and 32 percent, respectively. This is the immediate effect of the world-wide financial crisis – but how hard will the Czech economy be hit? Tomáš Sedláček is a strategist for the ČSOB Bank.

“We should expect a certain further slow-down of the economy, we should expect the strengthening of the euro and of the Czech currency, but our capital markets should continue to weaken and the turmoil will be quite substantial. Sunday, Monday and today have been critical days, and the turmoil might result in some unpredictable consequences.”

As a result, the Czech government may have to be forced to revise its budget policies. The Czech economy’s growth rate - estimated at 4.8 percent by the Finance Ministry – will probably be even lower. But there could be more immediate consequences as well. Jan Macháček is a columnist for the weekly Respekt.

“We would also feel a credit crunch which is already felt around the globe, in America and in Europe. This also has to do with the fact that our banking sector is closely connected with the Western banking sector in that there will be new, more cautious rules and banks will be more careful in providing loans to risky clients.”

Photo: CTK

The Czech cabinet is very hesitant to set a benchmark for euro-adoption, making the Czech Republic the only country in Central and Eastern Europe without a target-date for entering the Eurozone. ČSOB Bank’s Tomáš Sedláček says that in an unstable environment, the euro can help.

“The euro has acted for many European economies as a protective shield in turbulences such as these. Floating currency does, of course, have its advantages, but in the modern and turbulent world, far larger economies than the Czech one, have opted for protection in a single currency unit. So I would say it’s much safer and less risky to be included in a buffer zone.”

Photo: CTK

Within the last year, the US government and the American Federal Bank have taken similar measures as several Czech governments did throughout the 1990s – saving some banks while letting others fall. The Czech Republic has been sued for preferential treatment by some investors as a result. Is there a difference between what the Fed is doing now and the Czech National Bank did back then? Jan Macháček again.

“The difference is that we had a wave of banking scandals and failures whereas in the developed world, they somehow forgot about the fact that a bank can also go under. In the United Kingdom, for instance, when the bank Northern Rock was in trouble, it was the first bank run in a hundred years. So even though these things are described in textbooks, I think that the West did not have a direct experience with bank failures, whereas we did – although for different reasons.”