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Problems for sale

Want to buy a bank stacked full of bad loans and losing money? The Czech Republic may be able to oblige. While the second-largest, Ceska Sporitelna, looks like going to Austria's Erste Bank, the biggest, Komercni Banka, is still up for grabs. Finally, after years of dithering and excuses, bank privatization is now happening. But the assets are worth much less since the banks ran into serious trouble. Czech government problems don't stop there. Many companies the banks lent to are floundering, capital markets are still in their infancy and the legal framework falls short. The Czech Republic is a case study of how not to handle transition. Brian Caplen reports.

When financial historians come to write about the Czech economy in the 1990s they may pick one of the following clichés to describe it: "the lost decade", "the invisible revolution", "the Prague winter". Any of these would describe how eastern Europe's most promising economy after the collapse of communism has, by way of incestuous politics and bad management, ended up as an also-ran. A damning report by the European Union, which singled out the Czech Republic as the only applicant among six that needed to make serious economic progress towards accession, fittingly sums up the last 10 years.

The good news is that the message is at last getting through to the government that essential reform is long overdue. Although things need doing on many fronts, the most critical reform and the one that has most held the Czech Republic back - bank privatization - is finally going ahead. Cynics argue that even now this is only being done because the government has no other choice: balance sheets are shot to pieces following years of lending to privatized companies, many of which are now bankrupt. With a budget deficit approaching 3% of GDP - close to the Maastricht ceiling - the option of continually bailing them out has disappeared.

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