Czech Republic no longer a safe haven for investors
The Czech Republic is ceasing to be a safe haven for property investors. It’s joined the ranks of other countries in Central and Eastern Europe which investors increasingly associate with high risk. To blame are worsening economic results and also the current political instability. This according to international consultancy firm DTZ.
‘The fall of the Czech government just a few days after the resignation of the Hungarian Prime Minister is leading to a loss of confidence in the Czech Republic even though it is perceived as one of the most stable countries in Central and Eastern Europe,’ said Ryan Wray from the Prague branch of DTZ.
In comparison with other countries in the region the Czech Republic continues to remain amongst those who are fairing best. ‘The recent declaration of no confidence against the coalition government wasn’t related to the current economic situation, even though that happened to be part of the opposition’s argument. But the fourth change in just six years is another unfortunate example of an internal rift which has plagued the leadership of the country for a long time,’ observed Wray.
Experts are predicting an increase in the number of cases of firms becoming insolvent. In their opinion we’ll see more properties coming onto the market for sale as a result of forced sales of frozen assets. It’s likely that banks will in these cases be willing to offer property for lower than market prices in order to realise a quick sale.
Topolánek tones down attack on US rescue package
A speech by Mirek Topolánek in the European Parliament in which he sharply criticised measures by the US to deal with the financial crisis shocked diplomats across the world. His statements made the front page of the UK Financial Times newspaper and were even commented by US President Barack Obama. Topolánek has jumped on the brakes in a letter to the Times trying to justify his position. ‘I believe that I don’t have to point out that the Czech Republic and the United States remain long term allies,’ wrote Topolánek.
Topolánek in a speech on Wednesday said that huge financial injections into the economy are a journey to hell, equating them to the repetition of mistakes made in the 1930’s. According to him some of the measures taken by the USA have raised alarm in the European Union.
The Prime Ministers words didn’t remain unanswered for long. Which is why in today’s edition of the British daily ‘The Times’ he has responded with a letter attempting to temper his assertions. ‘I expected that my words wouldn’t remain unanswered for long. But I didn’t expect that this legitimate note of caution, which seemed to me as natural as warning a friend on an uneven path that they could trip over, would be thrown out on-principle, and taken as a criticism of the American administration,’ wrote the Prime Minister.
The Czech Prime Minister apparently appreciates the differences between the European and American economies and this is why the rescue packages must also differ. He reminded that the strong social system in Europe works as an automatic stabiliser, which protects against acute falls in consumer demand. ‘This means that Europe doesn’t need such an extensive financial stimulus like the USA, which doesn’t have a similar system of social support,’ writes Topolánek in The Times. He further reminded that the European states are committed to a strategy of growth and stability which limits the size of national debt.
Even though Topolánek may have conveyed the opinions of regions of the EU in his speech, his words have mainly caused a diplomatic storm. ‘Even though many member states my in principle agree with him, none of them would ever put it in those terms,’ writes Honor Mahonyová for the EUObserver. The foreign daily also reminded that the relationship between Topolánek and the United States greatly cooled over the re-appraisal of the stance on the planned American radar base on Czech soil.
Czech National Bank decides to leave interest rates unchanged
Spokeswoman for the Czech National Bank Pavlína Bolfová announced today that the ČNB board has decided to leave base interest rates unchanged at 1.75%. The decision was widely anticipated by the markets. The central bank’s base rate was lasted lowered by half a percent at the beginning of February. The rate is currently at it’s lowest level since October 2005.
What influence will the fall of the government have on the Czech Economy?
The pronouncement of no-confidence against the Czech Government will undoubtedly have an effect on the economy. A couple of minutes after the fall of the government for example the Czech Crown reacted sharply and the currency continues to weaken today. The political instability also weakens much needed trust in the markets and the stature of the Czech economy in the world. On the other hand the markets are becoming quite used to hearing bad news. So what are the likely effects?
Regional Effects: Investors may again view Central and Eastern Europe as a whole and the situation in the Czech Republic could unsettle the whole region. The recent resignation of Hungarian President Ferenc Gyurcsány doesn’t help this view. We’ve already felt the effects of this dangerous generalisation last month when the Czech Crown fell on bad news from other Eastern European countries.
Effect on the Czech Crown: Immediately following yesterdays vote of no-confidence the Czech Crown fell 30 hellers against the Euro. It further weakened today reaching 27.40 Kč per Euro. According to Next Finance analyst Vladimír Pikora the market is waiting for further developments from the political scene. ‘The London players will be uncomfortable until the situation stabilises and will prefer to sell the Czech Crown’, said Pikora. In his opinion the Crown is also showing weakness from a technical perspective and he expects further falls.
Effect on confidence: The office of statistics revealed today that economic confidence grew in March for the first time since last February. Both households and business have higher expectations. It isn’t however possible to judge the what effects the fall of the government will have on this data. The study also shows however that confidence from our most important trading partner has fallen to an all time low. Managers and owners of German businesses are convinced that the economy is currently in decline, but also that it has to rebound.
According a member of economic advice team to the government (NERV) Tomáš Sedláček the vote of no-confidence against the Topolánek’s government is very unfortunate. It happened almost perfectly in the middle of the Czech Presidency of the EU and so damages his credibility. Sedláček added that in-spite of the fact that the fall of the government was in no way related to any economic factors, the foreign press may connect the two things.
‘In the case that ratings will be assessed by single country the Czech Republic could find itself in a disadvantageous position. That naturally has serious consequences for the obtain-ability of credit and the price of credit,’ said the president of the alliance for Industry and Transport Jaroslav Míl.
Effect on economic performance: Risk analyst for ČSOB Bank Jan Čermák supports the prediction that in the coming months the market will be weighed down by speculation that political instability will endanger public finance or even worsen, as in nearby Hungary. Other analysts however confer that political instability doesn’t always affect the market.
The alliance for Industry and Transport however consider a vote of no-confidence during the EU Presidency a negative signal to the whole of Europe and an incident which worsens the country’s image. The economic commission reacted in a similar way - in their opinion the fall of the government doesn’t in any way help to solve the current serious economic state.
Effect on the state budget: According to ČSOB Bank analyst Petr Dufek it’s a question of what will happen with the bond market. ‘Nevertheless in the case that the Czech Republic won’t have a strong government, no one knows how the public deficit will be managed and if the Ministry of Finance is going to be able to address this negative situation, and the growing deficit which is expected this year. We see already that actual bonds are falling in price and so becoming a burden on state borrowing’, said Dufek to Czech TV.
‘This declaration by the Czech Republic supports the argument of French President Sarkozy, who points out that small countries are unstable and not significant enough to take on the role of leading Europe. The bad name which we’ve made for ourselves will be around many years,’ said Industry Alliance boss Míl.
Topolánek: The US economic crisis strategy is a road to hell
Prime Minister Mirek Topolánek in the European Parliament today sharply criticised the measures taken by the USA in dealing with the economic crisis. According to him huge financial injections into the economy are a road to hell and equivalent to repeating mistakes made during the crisis of the 1930’s. He added that some actions taken by the USA have raised alarm in the EU.
‘It’s necessary to dust off some of our history books. The path chosen by the USA has been discredited by history itself,’ said Topolánek.
‘Geithner’s ideas about permanent intervention have raised alarm’, added the Czech Prime Minister. Opinions about intervention by the USA and EU (which to date stands at around 400 million euros), to support the economy differs not only amongst politicians but also amongst economists. The holder of the Nobel prize for economics Paul Krugman criticised the EU not long ago for not doing enough against the crisis, saying that it should make available larger financial resources.
Industrial Output suffers sharp decline, underlining recession
Year on year industrial output in the Czech Republic declined for the fourth month in a row to 23.3% in January this year. The figure is about 5% below what the market was expecting. Even the construction industry didn’t survive the downturn with an 11% year on year drop. The biggest production falls were in the transport sector with output down by a third. A dramatic fall-off in new orders indicates that firms are likely to suffer further problems.
Czech National Bank warns on economy
GDP in the Czech Republic could fall by up to 2 percent this year. This according to comments made by Zdeněk Tůma, Governor of the Czech National Bank to the British newspaper The Financial Times. The economy could experience a contraction of up to 2% if the recession in Eastern Europe worsens. Earlier in the year the bank had predicted that the Czech Economy would see growth of around 2.9%.
