CZECH PRESIDENT NAMES THREE NEW MEMBERS OF CENTRAL

UNCLAS PRAGUE 000239

SIPDIS

STATE FOR EUR/NCE, EUR/ERA AND EB/IFD/OMA
COMMERCE FOR 4232/ITA/MAC/MROGERS
TREASURY FOR OIA

E.O. 12958: N/A
TAGS: ECON PGOV EZ
SUBJECT: CZECH PRESIDENT NAMES THREE NEW MEMBERS OF CENTRAL
BANK BOARD

REF: 04 PRAGUE 1450


1. Summary: President Klaus appointed three new members of
the board of the Czech National Bank on February 11. The
three are known to be close both politically and
philosophically to President Klaus and the opposition Civic
Democratic Party (ODS). Klaus will have a majority of his
appointees on the CNB board after 2006. The new appointees
should not change the generally tough CNB approach to
inflation. Their presence will be most influential when the
Czech Republic begins to seriously consider adopting the
euro. End Summary.


2. On February 11, President Klaus named three new members
of the board of the Czech National Bank (CNB),the central
bank of the Czech Republic. The three are Miroslav Singer,
an economist with PriceWaterhouseCoopers Prague office, Pavel
Rezabek, the former head of the Czech Consoldiation Agency,
and Robert Holman, a professor at the College of Economics
(Vysoka Skola Ekonomicka, VSE). They replace the expiring
terms of Pavel Stepanek, Pavel Rachocha and Oldrich Dedek.
Klaus re-appointed Zdenek Tuma as Governor of the CNB.
Tuma's reappointment was rumored for some time, but still was
somewhat surprising in light of Klaus' past criticism of the
CNB under Tuma's leadership (reftel).


3. Of the appointments, the most controversial was
Rezabek's. Rezabek was dismissed in early 2004 from his post
as Director of the Czech Consolidation Agency, which is
charged with managing and liquidating the portfolio of bad
debt taken over by the government in the wake of the banking
crisis of the 1990's. Finance Minister Bohuslav Sobotka was
particularly displeased with Rezabek's handling of the sale
of a package of debt, title to which turned out to be
defective, for which the government had to reimburse the
purchaser Kc 370 million ($16 million). More of an
accountant than an economist, Rezabek has published no
professional papers. President Klaus seems to view this as
an advantage, saying that what the bank needs is a
"nontheoretician, someone who has lived every
micro-difficulty of individual firms and banks". Rezabek's
views on central bank-government relations, interest rates,
inflation and most importantly, the euro are virtually
unknown.


4. Singer is an ODS stalwart, and was advisor to ODS leader
Miroslav Topolanek on issues of public finance reform. He
was not afraid to criticize President Klaus (and then-Prime
Minister Zeman) for promoting a law that would have limited
the independence of the central bank, and he defended Tuma
from Klaus and Zeman at the time Tuma was first named
governor. Holman has advised Klaus in the past and is
associated with the conservative Prague think-tank the
Liberal Institute. He has expressed views in tune with
Klaus's that the central bank's inflation targets should be
set jointly between the bank and the government. However, he
has shown independence of his own when he became embroiled in
a dispute with VSE faculty over his refusal to hew to the
established (outmoded, in his opinion) curriculum there.
Most important, Singer and Holman reportedly share Klaus's
misgivings about the wisdom of adopting the euro.


5. Interest rates in the Czech Republic are at historically
low levels, and the advent of three board members known to be
close to President Klaus, who has always pushed the CNB in
the direction of lower rates, should not change that. To be
fair, with the current persistent upward pressure on the
crown, and low inflation rates that follow from the crown's
strength and the dollar's weakness, there is not much
advantage in raising rates higher. The new board members
will most likely be left to apply their independent judgment
to the day to day operations of the CNB. Moreover, they
still are in the minority of the board. This will change
when the mandates of board members Jan Frait and Michaela
Erbenova end in November 2006, and Ludek Niedermayer's ends
in 2008. The real test of independence will come when the
moment of deciding whether to adopt the euro arrives, and
after that, setting the intial exchange rate. Rezabek,
Holman and Singer, and the President's future appointees, are
sure to be receptive to Klaus' skeptical views on the euro.


CABANISS