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Velvet costs are piling up

An easy transition to capitalism is proving a mixed blessing in the Czech Republic. The so-called Velvet Revolution has left many essential works undone. Banks remain in state hands and underegulated markets have encouraged asset stripping and fraud. Then as former prime minister Vaclav Klaus began to get serious about change, his government fell. In the ensuing political stalemate, reform is the chief victim. Nigel Dudley reports.

Need for stronger Chinese walls


The Czech Republic built a reputation as an oasis of regional economic and political stability in the first seven years after the collapse of communism in eastern Europe. But, after what one foreign banker described as its annus horribilis, during which the country was battered by floods, a currency crisis, economic austerity measures, rising unemployment and a government collapse due to a political funding scandal, the Czech Republic faces a painful new year as it tries to bring the reform process back on track.

There was some respite for the country with the appointment of the Czech National Bank (central bank) governor Josef Tosovsky as an interim prime minister. But he has to win a vote of confidence this month if his government is to survive for a limited period before elections can take place.

The key test for international bankers will be if ministers press ahead with the sale to foreign financial institutions of major stakes in the three largest state banks, ensure that there is a properly functioning capital market by enforcing new stock exchange and investment banking legislation and take further steps to diversify an economy that is still dominated by low wage, low technology industries.


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