Dominic Swire in Prague -

If doubts were raised about the proposed regional collaboration of stock exchanges in Central Europe when Warsaw turned its back on the idea in August, the dream appears to be in tatters now as Prague Stock Exchange CEO Petr Koblic questioned the very logic behind the idea in an interview with bne, insisting that his exchange is strong enough to go it alone.

For years bosses of some of the stock markets in Central and Eastern Europe have dreamed of building a single exchange that would allow investors to trade shares from Tallinn to Ljubljana. The idea is to retain domestic autonomy for local investors, but then to create some sort of meta-platform that would allow Czech investors to buy Romanian shares in Prague and vice versa. But Koblic says nobody has yet given a clear idea of exactly what form this alliance would take.

"I keep hearing about a 'strategic alliance' or a 'Euronext' of Central Europe," Koblic says. "What is it? What is it? Euronext and OMX are technology-driven mergers of exchanges. That's the only working scenario of the merger of exchanges I know."

Yet a technology-driven merger is precisely what Prague doesn't need, says Koblic. One of the main benefits of the Czech stock exchange is its flexibility - any change to match a regional alliance can only reduce this benefit. "It recently took us just six months to build a new commodities exchange [Prague Energy Exchange] under our system. We'd never ever be able to do it if we had a system of a third party, never ever," says Koblic.

While not fundamentally opposed to the idea of joining a regional alliance, he says nobody has yet been able to offer him any compelling reason to do so. However, many observers point out that joining some kind of cross-regional exchange would help Prague attract a greater number of listings that it desperately needs in order to be taken seriously. The Czech Republic has been slow to catch the IPO bug sweeping CEE recently, which has seen billions of euros raised by Polish and Russian companies over the last two years. In December 2006, the Czech company Pegas Nonwovens became only the third ever company to IPO in Prague. At the time, Koblic said he expected more companies to issue shares in 2007; so far none have been forthcoming.

"I'm happy to talk to anybody about any idea, but based on some real and reasonable numbers - and I've been repeating that for three years," says Koblic. "Every time someone meets me and starts a discussion with the words 'let's make an alliance,' I usually stop them after three sentences and say, 'I've told you many times, bring me the numbers.' Without this nobody's talking to me anymore because there are no numbers."

Koblic's comments will be a blow to other exchanges in the region that have openly expressed a desire to link up internationally, notably Attila Szalay-Berzeviczy, chairman of the board at the Budapest Stock Exchange. Szalay-Berzeviczy told bne in July that, "Competing with each other is silly - Vienna, Budapest, Prague and Warsaw can be interesting together."

Many thought the first part of this organization had been formed in 2004 when Vienna stock exchange bought the Budapest bourse with plans to expand further across the region. Yet since then, IPOs have hardly been pouring in to Budapest and the exchange has even less liquid shares than in Prague, a fact not lost on Koblic. One Prague-based analyst who preferred not to be named went so far as to say Vienna's move into Budapest was its worst-ever investment.

Sleeping giant

Koblic says despite its seemingly weak position, the very fact the PSE is still here at all is testament to the strength of the exchange. "The PSE is in one of the best shapes it's been in over the last 13 years of existence," says Koblic.

It's true that the challenges faced by Prague over the last years have been severe. During the country's mass privatisation programme in the 1990s, some 1,700 companies were forced onto the capital markets, many against their will. Of these, over 90% have delisted with only six still actively trading. Problems continued throughout the 1990s, in particular with corporate governance, resulting in no IPO until generic drugmaker Zentiva's listing in 2004. The legal chaos was so bad that until this time many lawyers failed to believe that an IPO was even possible in the Czech Republic.

On top of these problems has been the Czech government's reluctance to use the capital markets for virtually any state privatizations, preferring instead to sell directly to strategic buyers. No other country in Europe shares the Czech government's scepticism of the capital market system, a fact that Koblic confides is slightly embarrassing. "When meeting heads of other stock exchanges in CEE my discussion is of how to convince our government to privatise through the capital market. It's very difficult to explain because in these countries when you talk about privatisation the first thing that comes to mind is listing."

In spite of this, Koblic maintains that it's still cheaper and easier from a technical and legal point of view to hold an IPO in Prague than in Warsaw. He cites an independent report by international legal firm Allen & Overy who helped organise the dual listing of Czech firm Pegas Nonwovens on both the Prague and Warsaw markets in July. In several respects, the report found the system in Prague to be less complicated than Warsaw, not least because the whole process can be done in English, which is not possible with the WSE. The report was scathing about the Polish national depositary, which it called, "an extremely formalistic and inscrutable institution, which may seriously complicate a public offering in Poland."

Nevertheless, none of this changes the fact that on paper at least, comparisons with Poland in almost every respect still make Prague look like an unimportant regional backwater. However, Koblic is at pains to point out that a comparison with the Warsaw exchange is vastly unfair due to the Polish government's extremely supportive law that protects the domestic capital markets, which dictates that Polish pension funds must invest 95% of their assets in the domestic market. Koblic argues that Prague could be doing a lot better with a similar law, but says such speculation is folly.

"Can you imagine the UK passing a law forcing all big banking funds to invest 95% of their investment funds just in the London Stock Exchange? Funny, isn't it? Funny in any country in the world but not in Poland. It's a waste of time to ask if I would like that law here. Nobody would even think about such a crazy thing in any OECD country," sniffs Koblic.

After surviving such a turbulent history, Koblic and his cohorts can indeed be proud that the exchange is still operational. Yet despite overcoming such odds an even greater challenge lies ahead, namely changing the business mindset of the country and persuading more Czech companies to consider listing in Prague. However, with so many companies attracted to the bright lights of Warsaw, this is easier said than done.

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