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It is no news that the biggest losers of the inflationary tsunami are households that had a lot of savings and inflation really screwed them over. But who lost among the companies?
Those businesses that have access to loans only in crowns, i.e. typically small and medium-sized companies that form the backbone of the economy, lost. They were hit the hardest by the strict monetary policy of the Czech National Bank, which has kept the main interest rate at seven percent since last year. The CNB fights against inflation mainly by setting interest rates. With higher interest rates, banks will provide fewer loans, which slows down the economy and lowers prices.
However, as the current study by Vice-Governor Eva Zamrazilová and her advisor Jakub Holas showed, companies in the Czech economy do not play on a level playing field. Mainly large, exporting and foreign companies that have access to cheaper euro loans are favored. Cheaper loans mean lower costs, which can be a matter of survival in an era of expensive energy.
The “Euroization” of the economy has expanded massively over the past year. Companies in the Czech Republic currently have about 1.7 trillion crowns in euro loans, and about 1.3 trillion in crowns. Two-thirds of the euro loans are from banks and one-third from parent companies, where typically a foreign parent loaned to its Czech subsidiary.
In times of financial stress following the Russian invasion of Ukraine, when costs in the form of high energy prices have skyrocketed and wages are rising, and when companies need to invest in energy efficiency or overcome a period of lower demand for their goods, Czech banks will lend them a loan in crowns for nine , 10 or 11 percent per year, or they won’t lend to them at all.
Export and foreign companies borrow euros at a rate four, five to six percentage points lower. But foreign companies have one more advantage – unlike banks, their parent companies do not leave them in the lurch.
Commercial banks are special animals. They like to lend when the economic weather is favorable and the outlook for the future bright. However, when the economy falters and the outlook darkens, the credit taps are immediately turned on, and cautious bank officials – rather than risk having to assess the creditworthiness of a company in a confusing situation – prefer not to lend anything.
In addition, “Euroized” companies not only have lower costs, but they can also more cheaply finance the purchase of lucrative assets of domestic companies that run into problems.
So does Czech monetary policy make sense in a country where businesses are mostly financed in foreign currency? It makes sense to pay in the Czech koruna, whose exchange rate fluctuates not according to the actions of the central bank, but according to the mood of international investors, who, at the slightest sign of trouble, react with an immediate rush to the center of the financial system, where they start buying US government treasury bills and “emerging market” securities including the Czech Republic are getting rid of?
Czech monetary policy is dependent on the actions of the Federal Reserve System in the United States, respectively on the actions of the European Central Bank. Its actions do not have the necessary effect and, on the contrary, bring down the Czech “mittelstand”, i.e. small and medium-sized companies, which are the basis of the economy.
“The long-term preservation of an uneven playing field threatens structural distortions of the entire business sphere, when even relatively healthy companies dependent on loans in the domestic currency, typically small and medium-sized enterprises, could disappear due to long-term expensive financing. On the contrary, even less promising companies with the possibility of euro financing could gain a relative competitive advantage and the ability to survive,” conclude Holas and Zamrazilová.
Central bankers and “patriots” will scream that we need the crown, that it is part of “our identity” and an inherent heritage of “our culture”. But don’t listen to their screams. They will probably agree with you once they recover from the initial shock.
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