SLOVAKIA LOSES USD 867 MILLION ARBITRATION WITH

UNCLAS BRATISLAVA 000031

SIPDIS


DEPT PASS TO USTR FOR RDRISCOLL
TREASURY FOR CHRISTOPHER GREWE
USDOC FOR MROGERS AND STIMMINS

E.O. 12958: N/A
TAGS: ECON EFIN LO EZ
SUBJECT: SLOVAKIA LOSES USD 867 MILLION ARBITRATION WITH
CZECH BANK


1. Summary. An arbitration court has ruled in favor of the
Czech bank Ceskoslovenska Obchodna Banka (CSOB) in its claim
against Slovakia and ordered the GOS to pay the bank SKK
24.7 billion (USD 867 million). CSOB's claim dates back to
1993, when it provided a loan to a special state agency set
up to assume CSOB's bad debts as part of a division of
assets between Slovakia and the Czech Republic as the
successor states of the former Czechoslovakia. The GOS has
not decided whether it will appeal the ruling. The GOS had
already established a reserve fund to help pay for eventual
settlement of this case, which should help minimize any
adverse effects it might have on the GOS's future spending
plans and its ability to qualify to join the Euro zone in

2009. End summary.


2. On December 29, the World Bank's commercial arbitration
tribunal, the International Center for Settlement of
Investment Disputes (ICSID),ruled in favor of CSOB in its
claim against Slovenska Inkasna (SI),the Slovak state-owned
debt factoring firm. The arbitration panel ordered the GOS
to make one-time payment of USD 867 million to settle the
dispute. SI was formed in 1993 following the split of the
former Czechoslovakia and subsequent division of the federal
property. It was created to help dispose of a portion of
CSOB's bad loan portfolio and CSOB issued SI a loan to
finance its activities. However, SI only repaid 15 percent
of its SKK 10 billion (USD 300 million) loan before ceasing
payments. Since its privatization in 1999, CSOB is a unit
of Belgium's KBC Bancassurance Holding NV.


3. According to CSOB, since 1995, its claim has risen to
SKK 32.4 billion (USD 1.14 billion) including interest and
lost profit. However, the ICSID tribunal's ruling awarded
CSOB the aforementioned SKK 24.7 billion (USD 867 million).
Interestingly, in order to help CSOB's privatization, the
Czech government agreed in 1998 that if CSOB lost the
dispute with Slovakia, the Czech Republic would pay it SKK
30 billion. Media sources have speculated that the ICSID
ruling also means that the Czech government should pay SKK
5.3 billion (USD 186 million) to CSOB in compensation
because it received less than the SKK 30 billion the Czechs
had agreed to pay.


4. The Slovak MOF said it would not elaborate on the issue
until after a thorough analysis of the ruling by its
lawyers, but it plans to submit a list of options to the
Slovak cabinet next week. If the GOS does not appeal the
decision, paying the claim could be counted against its 2004
budget deficit and increase it to 5.8 percent of GDP from a
planned 3.9 percent. However, Finance Minister Ivan Miklos
stated that Slovakia had already established a SKK 16
billion (USD 561 million) reserve fund to help offset this
potential loss. Other MOF officials have said that the
ICSID decision is "not a tragedy." In addition, revised
figures for Slovakia's 2004 budget deficit show that the
shortfall could be revised downward by more than SKK 8
billion (USD 280 million). The MOF has stated that it will
not issue new foreign debt to cover this expense and CSOB
has even said it would consider allowing Slovakia to pay the
claim in installments over several years. The GOS seems
generally unconcerned that this decision will adversely
affect its future budgetary plans, or prevent it from
reducing its budget deficit below 3 percent of GDP by 2007
in preparation for adopting the euro by 2009.
THAYER


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