US embassy cable - 05BRATISLAVA31

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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