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Czech Republic: Banks prepare for privatization

The Czech Republic's voucher privatization left old managements in control of companies still owned - now indirectly - by the state. Though not the only reason for the country's transformation from regional leader to laggard, the mishandled sale of state assets weighs heavy on the economy. Will the government get the sale of the big state-owned banks right? Rebecca Bream reports.

For the ten years since the fall of the Berlin wall, the Czech Republic has been the darling of foreign investors. It seemed to achieve a painless transition towards a market economy while its neighbours suffered endless economic and political problems. The mid-1990s saw GDP growth reaching 6.4% and industrial output growth peaking at 8.7%. Public spending, wage levels and the value of the Czech Koruna continued to increase.

But since the start of 1997 the pressures of the burgeoning trade deficit, declining domestic demand and a currency devaluation have brought an end to the Czech Republic's economic miracle.

Although in 1998 external imbalances have been virtually eliminated, with buoyant exports helping the current account deficit to just 1.6% of GDP (25% of 1997 levels) and external debt falling as a share of GDP and foreign exchange receipts, the severity of the downturn in domestic demand has pushed the economy into a recession that has wiped 2% off GDP in 1998.

The Republic's neighbours in the so-called 'Golden Triangle', Poland and Hungary, have continued their transition processes successfully, now eclipsing the Czech Republic in terms of investor interest and foreign business. "Foreign investors have really been put off the Czech Republic," says Anna Bossong, head of emerging Europe research at Daiwa.

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