Prime Minister Mirek Topolánek's address to the Senate on the occasion of discussions on the banking law

Esteemed Mr. Chairman, Esteemed Senators. After yesterday's ceremonial start to the Senate's functioning in a new two-year term and after the appearance by Mr. Minister Kalousek, allow me to be more worklike and put forward the proposal you are going to discuss in a somewhat wider context. I will not return to the specific proposal, which is one of the steps in a mosaic of steps which are today standard and conforming both as part of ECOFIN, the meetings of the finance ministers, as well as part of the European Council, and part of the European Commission's specific fundamentals. I would like to discuss how the financial crisis began, the ways and means the EU and possibly national states can face the problem, the way it could spread, what kinds of potential impacts it could have on our economy and what the government can do against it. Today there is nearly nothing as important as the how the crisis in America began, aside from possibly the solutions and proposals - both short-term and systematic steps - to have this issue within oversight, so that we do not have to solve things we should not be solving. At the start of the entire problem was, of course, state interference. State interference which made the provision of mortgage loans to uncreditworthy or less-creditworthy clients more advantageous. This advantageousness led of course to financial institutions as well as their clients and clients of mortgage institutions to have a lower level of caution, which of course led to the formation of a giant number - I would say 1/3 – of mortgages were very problematic, very complicated to repay. And this would not be such a problem if the sector itself had remained isolated and it related only to the United States. But due to derivatives trading, due to trading in all kinds of products on the financial sector and due to securitisation, which is the principle that enabled exactly these types of assets to be processed with a lower level of caution and therefore potentially with a greater level of profit and also risk, these assets spread throughout the entire financial world, and even relatively healthy financial institutions and banking houses were hit. So I would say that a crisis of caution or transparency became a crisis of confidence, because after clear signals that these assets would not be at this value and that it was not possible to count on those kinds of yields, certain banks, insurers, mortgage lenders, financial institutions in the United States began to panic, and despite the activation curve, this process actually began to spread into the financial world through global business. A liquidity crisis occurred in these institutions and in the end a solvency crisis as well, which led states to relatively bold measures, which caused even greater panic and even greater losses of confidence in the financial world; where expectations and trust are absolutely fundamental to what you work with, what actually has influence on the behaviour of individual subjects and that is true both for these institutions' clients as well as the institutions themselves. How is it possible that the Czech Republic remained partially spared from this main stream of the financial crisis? There are several reasons. The first reason is that the crisis of 1997-98 led to far stricter banking oversight, which financial institutions in the Czech Republic work under to this day. Bank oversight from our central bank is today at a higher level of standard than the eurozone. Mandatory minimum reserves, capital soundness, the involvement of these banks, risk categories and risky loans work today on a higher level of standards than is common in the eurozone. I would say that is the first reason. The second reason is that our financial institutions have not worked with such a level of assets as to be immediately threatened by this wave and the panic that spread in the financial world. The third possible reason - and this could also be already on the government's account - is the confidence of clients, Czech depositors, whether institutions, companies or individuals. These instititutions are in a higher position and this is also due to the fact that we are prepared for a certain amount of recession or cooldown. All of the voices that spoke of how the Czech Republic did not have to do anything with its budget, did not have to do anything with the spending side of the budget, with the growth in supplementing spending, have been shown to be very cheap, and practically this trust in the system remained untouched in the first phase of the financial crisis in the ways that occurred in other countries. It may be worth noting that in contrast to others, the Luxembourg and Czech banking systems have the highest level of what I would call liquidity in deposits necessary to provide a loan, and that means that here there were no drops in liquidity. Liquidity means money, and these banks had a lot of it. They had little trust in the entire system, because in the short term what occurred was a short-term freeze in trading in government funds, there was a freezing and limiting of interbank contact, and those were the first steps that the central bank, in cooperation with the government had to immediately solve in the first days and weeks. Systems such as the ones that monitor liquidity movements are monitored daily, etc. What can the government do in the coming period? After discussions with analysts, with the Czech banking association and the central bank, where Mr. Governor Tůma last informed the government on Monday in great detail about certain steps, symptoms that could secondarily strike the Czech economy. The government must assume that despite the Czech Republic surviving the first wave of the financial crisis in good health, it will not be spared secondary influences on the economy and an already-expected cooldown of the economy. This of course results from economic cycles and a cooldown of economies in the eurozone. It is added to, of course, by a recession, and in certain European countries there is even negative growth. This means a decline in the economy with an impact on such an open export economy as the Czech Republic's, on the functioning of our companies, on their level of unemployment, on their ability to export commodities and services, on decreased demand in the eurozone, on our great dependence on the eurozone and on the Federal Republic of Germany. The steps the government must take are rather indirect, and rather have to do with strengthening the flexibility of the labour force. And here I challenge all of you, before you start to dicuss the labour code, to remove the rigidity, the immobility of labour market, which causes such problems like this: A country that has 130,000 available jobs, which has roughly 250,000 legal labourers working herewe should use this cushion to dampen the possible impacts of unemployment, but only when the labour market is more flexible. Another tool is to increase our countries' export capabilities; the impacts will be much greater on small and medium enterprises than on large ones. Large companies always manage to get through somehow, but nonetheless the squeezing out of lending, the squeezing out of loans for households and for small and medium enterprises will be one of the accompanying phenomena of the coming period. This means that the strengthening of the ability to get to a loan for small and medium companies is one of the ways to react in a way, and therefore we want to strengthen the engagement of the Czech Export Bank, and possibly the Czech-Moravian Guarantee and Development Bank – and possibly the EGAP insurance vehicle. President Barroso yesterday made public the information on the European plan for the renewal of growth and employment, and I had the opportunity to speak on Friday with the director of Barroso's cabinet. We support this plan in its basic points and it will be implemented during our presidency. This means an increase in loan engagement by the European Investment Bank from roughly EUR 45 billion to EUR 65 billion especially for projects relating to small and medium enterprises, energy and climate policy, regional projects, possibly infrastructure, which by the way could help to start new growth at a time of a cooldown of the economy. I do not want to discuss this plan in detail, I only want to set this honoured chamber, the Senate, at ease that the Czech government during our presidency will very actively work in this area, so that we as a country will know how to reach for projects, so that we will be able to possibly modify the individual calls of operating programmes in such a way as to possibly use this money. As with every government, a mandatory point of every meeting of the government will be the European Union agenda and of course the economic agenda, which will relate to exactly the problems I have described. We would like to further create a space through our budget and economic policy for low interest rates and to support in this way investment and export, which will be threatened the most in this cooldown. Communication with the central bank is above-standard, and we today are carrying out very intensive discussions on currency issues, and are of course consulting on the tools the government has in its hands, the fiscal tools. We regularly receive information from the area of loan provision, development of interest rates and other details, and we want to have absolute monitoring so that we can react if necessary. This means the possible realisation of a Plan B, which means that secondarily, through the cooldown of the economy, this could set off a round of financial problems for individual institutions as an unwanted effect. I think this is roughly all that I want to tell you. I wanted to inform you on the agenda this is an agenda that we are are taking on first-hand. The real communication between the government, the Finance Ministry and the Central Bank is above-standard – I would say that in the entire 19 years it has not been as good as this. This should be a guarantee for you as well that we will take no steps that lead to greater insecurity, to an increased lack of confidence, to negative expectations and hopefully together we will be able to handle the negative phenomena that could appear in the Czech economy in the coming period. Thank you for your attention.