US embassy cable - 05PRAGUE239

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