Is the Czech Republic ‘Good for its Word’?

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Jeremy Monk, AKRO investiční společnost, a.s.
The Mysterious Case of the Czech Pre-War Bonds and the ‘Secret’ 1984/1986 Agreements

Scripophily isn’t without its own controversies. The recent discovery of the original signed 1984 and 1986 agreements between the Bondholders Protective Council and the Czechoslovak State, in the archives at Stanford University Libraries, calls into question the transparency and integrity of the Czech State; both past and present.

A review of the archive material also raises fundamental questions about the actions of the US State Department and their appointed agent, the Foreign Bondholders Protective Council (FBPC), which left many US dollar bondholders, with seemingly valid claims, with minimal or no compensation and no effective means of legal redress. Principles of fairness and equality were blatantly abandoned and (New York) securities laws undermined. Instead, the bond settlement became a means by which the then Socialist Czechoslovak government could settle old scores. Czech émigrés, and those who by chance held bonds subject to a New York Supreme Court ruling against the Czechoslovak State, were particularly disadvantaged. In the ‘’grandstand farce’’ that ensued, it seems many bonds, even some stamped as eligible, didn’t receive compensation.

Up until now, the contents of these agreements have been a closely guarded secret by the Czech Ministry of Finance. Hardly surprising as, on reviewing these agreements, not only are they highly discriminatory, it is clear that bonds stamped as accepting a 1984 Memorandum of Procedure were entitled to receive an additional, very large, lump-sum payment.  Furthermore, the 1984 agreement committed the Czechoslovak government to make reasonable provision for the late presentation of bonds. Lastly, the terms of the 1986 Final Settlement committed the Czechoslovak State to deposit such funds with the paying agent as shall be required. The fact so many eligible bonds remain in circulation, the evasive behaviour of the Czech State, and archive evidence of repeated urgent requests for additional funding suggests, on all three counts, the 1984/1986 agreements weren’t fully honoured.

Now that the truth is out, it begs the question: Isn’t it time for the Czech State to re-open the offer and make good on its word? The author feels that that part of any renewed offer, made payable to those originally discriminated against, should in part, be funded by the US Government. Evasive answers by the Czech MOF should be replaced by an open and honest representation of the facts. Documents to which bondholders were deemed to have ‘consented’ should be made available to them. Readers of this article may feel that official apologies from both the Czech MOF and US State Department are in order. The Settlement could, and should, have been managed better by both sides.

An Intriguing Stamp
Collectors of old Czech bonds will notice that certain pre-war dollar denominated bonds have never been cancelled and many still retain their coupons (for collecting their future interest payments). Instead, many bonds issued by the City of Carlsbad (1924), City of Greater Prague (1922) and Czechoslovak Republic (1922 & 1924) have stamped across them:

‘’This  Bond is subject to the terms of the memorandum of procedure dated May, 25th 1984 between the Ministry of Finance of the Czechoslovak Socialist Republic and the Foreign Bondholders Protective Council, Inc. A payment on account was made at the time this bond was stamped. Any holder of this bond by acceptance thereof shall be deemed to consent to all the terms and conditions of the Memorandum of Procedure’’.
Top: A tempting Offer? Illustration from The City of Carlsbad loan of 1924 showing the mythic figure of Hygeia. Source: Author’s Private Collection.
Above: The stamp as it appears on many pre-war dollar denominated bonds. More than 30 years later, this stamp represents one of the few tangible reminders there was ever any agreement.  Source: Author’s private collection.

An Intriguing stamp to find on old bonds originating from the early 1920’s; as 1984 isn’t so long ago. The Memorandum of Procedure referred to in the text of the stamp was an agreement, signed on 25th May, 1984 and finalised on the 26th November, 1986, between the Czechoslovak government and the now inactive American Foreign Bondholders Protective Council (FBPC), the latter being a non-profit organisation representing foreign bondholders.

Diplomatic Bungle

The bondholders agreement was initiated as part of a wider diplomatic agreement between the US and Czechoslovak governments. This involved the return of 18½ tons of Czechoslovak gold (10 tons from Britain and 8½ tons from the US) which had been seized by the Allies at the end of WW2. While on the one hand, the Communist Czechoslovak government wanted the gold back, on the other hand, foreign investors, including the bondholders, wanted compensation for the losses they incurred after the Communists took power in 1948. Apart from the confiscation of private property from 2,500 Americans, in 1952 the communists had also defaulted on all their dollar-denominated bonds. Hence the agreement.

Unfortunately, it appears American diplomats took the Czechoslovak government at its word. In 1982 18½ tons of gold, worth $270m at the time, was returned to the Czechoslovak State.  In return, approximately $81.5 million of compensation was divided proportionately among Americans who had owned property in Czechoslovakia, e.g. homes, farms, commercial buildings, bank accounts, automobiles. As an annex to the diplomatic agreement¹, the Czechoslovak State committed itself to negotiate with the FBPC with regard to the bonds.

FBPC Negotiates from a Position of weakness

The FBPC itself criticised the return of the gold prior to any bondholders’ agreement as it left the FBPC to negotiate from a very weak position.
Not only was the somewhat premature return of the gold criticised, so was the appointment of the FBPC to represent bondholders’ interests. At the time of the 1982 gold transfer, Professor Hubert Park  Beck, himself a bondholder, criticized the way the matter was handled, saying: ''This law [returning the gold] takes away the bondholders' clout. We are at the mercy of the Foreign Bondholders Protective Council. In the past, I have found the council to be capricious, to say the least.’’² In justification of these rather harsh comments, Prof. Beck used the example of a recent FBPC settlement which had excluded Foreign Citizens. He pointed out that, had he died, his daughter, a Canadian, would not have had any compensation.

Nor was the choice of the FBPC popular with other bondholders. In a letter to the FBPC dated July, 1st 1985, Kenneth M. Spang, Co-Chairman of the Bondholders’ Committee for Settling the Defaulted Dollar Bonds of Czechoslovakia, requested: ‘’… the Council to designate our Committee of holders to negotiate the definitive settlement terms and the eligibility terms of the bonds. They…would be free from the precedents previously set by the Council with other East European countries.’’
In a follow-up letter, following ‘’a meeting of the holders of a clear majority of the outstanding defaulted dollar bonds of Czechoslovakia’’, dated August 26th, 1985 Mr Spang added: ‘’The Committee has felt that the interests of the U.S. Government and those of the New York financial Community through its representatives on the Board of the ‘’Council’’ may result in a willingness to accept a settlement which is mediocre and unfair to the holders.’’ Kenneth Spang’s criticisms carry added weight as he himself had previously been President of the Foreign Bondholders Protective Council³.

Long List of Excluded or Disadvantaged Securities

The weak negotiating position soon became apparent. Initial discussions had centred on $3m of outstanding bonds from 4 different issuers: First Bohemia Glass Works (1924), City of Carlsbad (1924), City of Greater Prague (1922) and Czechoslovak Republic (1922 & 1924).
      a)     Though nationalised, bonds issued by the First Bohemia Glass Works (První česká akciová společnost pro výrobu skla), were removed from the list, somewhat to the surprise of the FBPC. Notes from a Prague Meeting held on 9th March, 1984 include: ’’Mr. Petty brought up the Bohemian Glass Works bonds as an item which had inadvertently been omitted from the listing of Czech bonds. This created some consternation but it was agreed that the subject would be discussed later.’’ That knocked an initial $300k off the number of outstanding bonds.
  First to go. The dollar debt of the First Bohemian Glass Works was "inadvertently omitted?
  Illustration: Muzeum cennych papiru

b)     Certain bonds, held by two State owned banks doing business in New York, had been sold as part of a New York State Court ruling, Stephen v. Zivnostenska Bank (1962) and Wolchok v. Statni Banka (1962), to compensate the Augstein family who had had their properties nationalised.  The Czechoslovak government had a list of the serial numbers of these bonds. Meeting notes from a September, 23rd, 1982, meeting in Prague noted that: ‘’The Czech position seems to be...Czechoslovakia recognizes no further obligation to purchase these bonds from the speculators who purchased at the judicial sale or from the transferees of such speculators.’’ Clearly, the Czechoslovak negotiators sensed an opportunity for a payback from the court ruling. These bonds, were singled out for a reduced offer, even though they had never been cancelled. [Author’s note: Why State banks were holding these securities in the first place is a question. There are repeated allegations in the FBPC files that the Czechoslovak State, while in default, was buying back its own debt at deflated prices]. The Augstein bonds represented another $200k outstanding.

      c)     Bonds sold in the first instance in Czechoslovakia and not in the United States (the so-called ‘’In Block’’) were knocked-off the total. A New York Times article⁴ reported officials saying: ‘’Bonds smuggled into the United States by Czechoslovak émigrés will also be disqualified.’’ Again, Czechoslovak government officials sensed the chance of a political ‘payback’ against émigrés, many of whom were openly critical of the Communist regime. Strangely, the issue of émigrés hadn’t been an issue in the ‘across-the-board’ offer made to sterling bond holders in 1960. That knocked a further $500k off the number of outstanding bonds.

Not only did these measures dramatically reduce the number of bonds which were eligible for the settlement; it turned the settlement into a lottery. The serial numbers of the affected bonds were known only to the Czechoslovak Government. Investors who had bought bonds traded on the New York Stock Exchange had no idea where their bonds came from as the affected serial numbers were not publically available. It was pot-luck if they were entitled to a payment or not.
As a consequence of the above measures, numerous bonds were discriminated against in the settlement; other bonds completely excluded. Indeed, when the offer was finally announced and it was realised how many bonds were excluded, on February, 6th, 1987, C. Rodney O’Connor, Chairman of The Bondholders’ Committee for Settling the Defaulted Dollar Bonds of Czechoslovakia wrote to John R. Petty, Chairman of the FBPC, describing the offer as a ‘’grandstand farce’’. But the shenanigans didn’t end there.  

The Secret Memorandum

On 25th May, 1984, ahead of any Final Settlement, a Memorandum of Procedure was signed. For their part, the mainly American bondholders received a token 2.5% ‘payment on account’, and the stamp saying they consented ‘’to all the terms and conditions of the Memorandum’’. The stamp, and initial down-payment, represented confirmation that those bonds were eligible to receive the full payment in the Final Settlement.
The Czech Ministry of Finance (MOF), right up until the present day, refuses to divulge the terms and conditions of either the Memorandum of Procedure [yes, the ones that bondholders are deemed to have consented to!!!] or the 1986 Final Settlement. What is also clear, is that in exchange for the return of the 18 ½ tons of gold, many American bondholders only received an insignificant payment and a [worthless?] stamp which refers to an agreement few have seen. Other bondholders didn’t receive anything.

A Question of Transparency and Market Integrity?

Not only does the Czech MOF seem reluctant to disclose the Memorandum, the MOF even seems reluctant to authenticate the bonds which were subject to the Memorandum⁵. Finally, they seem reluctant to say whether the Memorandum and Final Settlement were honoured [‘’The American party accepted the offer and an international agreement was signed’’⁶]. Despite owning some of the bonds, stamped as eligible, the author’s own emails to the MOF have been met with evasive answers. Furthermore, despite repeated requests, a copy of the Memorandum of Procedure has also not been forthcoming; nor a reason for the non-disclosure of this key document. Five years ago controversial activist, Edward Fagan, had a similar experience. The national regulator, the Czech National Bank (CNB), says it’s powerless to help⁷. Without access to the 1984 and final 1986 agreements, and matching them against payments made post the agreements, it is difficult for most bond holders to pass judgement or seek independent legal advice. Is the Czech Republic trying to hide something? Hence the current obfuscation.

Above: The Coat of Arms and motto ‘’Truth Prevails’’ as it appears on the 1922 Czechoslovak Loan. Source: Author’s private collection.

‘’Truth Prevails’’ – What Really Happened

Fortunately, the author was able to track down the documents from another source. To the author’s delight and surprise, the archives of the now inactive Foreign Bondholders Protective Council, at Stanford University Libraries, include the original agreements. In another stroke of good luck, a friend of the author, Dr. Jan Červenka, was recently presenting at Stanford University and was able to take a look at the archives⁸. Appendices 1 and 2 summarise the main terms included in the 1984 Memorandum of Procedure and Final 1986 Agreement. 
a)     Memorandum of Procedure
Under the terms of the 1984 Memorandum, notices of the Czechoslovak Ministry of Finance’s intention to make a definitive settlement were mailed by the FBPC directly to known bondholders. Notices were also published in the Wall Street Journal and New York Times. Bondholders were recommended to submit their bonds to the Czechoslovak Government’s Paying Agent (Irving Trust, New York) who would receive the bonds, record their details, make an initial 2 ½% Payment on Account, stamp the bonds, and then return the bonds to the holders. Certain of the bonds, i.e. Augstein and Inland bonds, had their details recorded but were not entitled under the agreement to receive either the stamp or Payment on Account. The deadline for submitting bonds was July, 31st. 1985. Table 1 summarises the details of submitted bonds immediately prior to the making of the Final Offer.  In total, bonds with a ‘face value’ of $1.65m were submitted. The large number of ‘late presentations’, i.e. after the deadline for submitting the bonds, but before the Final Settlement was announced (December, 29th, 1986) reflects the fact that one year 4 months had elapsed between the deadline for bond submission and agreement on the final offer. During this time, of course, many more bond holders got to hear of the potential offer and presented their bonds.

Table 1: Presentation of Bonds prior to Offer
*98% for regular bonds, 20% Augstein Bonds                                                                                        
Additional Notes: $1,000 of Bohemian Glass Works bonds were also presented. In 'error', the paying agent stamped $14,900 of 'Inland Bonds'. Source: Data attached to internal FBPC letter from Richard Dine to John R. Petty dated 7th Nov, 1986 and author's calculations.

b)     The ‘Final’ Offer
When the Final Settlement was announced all those bonds which received the 2 ½% payment on account, and duly stamped as accepting the offer, were eligible to receive an additional one-off payment representing 95.5% of their face value, bringing the total payment to 98% of the face value. Augstein bonds received no stamp but were entitled to receive a payment equal to 20% of their face value. To accept the offer, holders had to surrender their bonds to the paying agent (Irving Trust) between December, 29th 1986 and December 31st, 1987.
The Offer carried the recommendation of the Foreign Bondholders Protective Council.

Reaction to the Offer

Within days of the offer being announced on November, 26th, 1986, Prof. Beck was in contact with the FBPC to express his ‘’intense disapproval of the Czech Settlement’’.

In an internal letter to John R. Petty, dated Dec. 5th 1986, Richard Dine wrote: ‘’Mr. Beck was particularly upset by the differentiation of the Augstein bonds. He noted that the State Supreme Court, in its Augstein ruling, held these bonds to be the equal of other Czech bonds and that the 20% settlement violates the court’s intent. He further noted that the serial numbers of the Augstein bonds had never been made public, so that people purchasing these bonds in the secondary market could not have known about the possible lower settlement. He threatened that bondholders would sue the Council, and yourself’’. Richard Dine went on to add: ‘’Mr. Beck also objected to the overall settlement. He noted that the present value of 75% settlement made on sterling bonds in 1960 would equal 225% for dollar bonds settled now’’.

While the headline 98% of Face Value had, in fact, been within the range of similar settlements, the discrimination against certain bond holders did provoke an emotional reaction from others on the Bondholders’ committee. C. Rodney O’Connor’s ‘’Grandstand farce’’ letter, dated February 6th , 1987, has already been noted.

In a reply to C. Rodney O’Connor’s letter, on 2nd March, 1987, John R. Petty, President of the FBPC, replied: ‘’The Augstein bond settlement was simply the best we could get. Up until the last, the Czechs refused even to consider them being involved in the settlement. We had two choices: stand firm on equal treatment for the Augstein’s and, in all probability, have a stalemate; or settle as we did. You must recall that the late presentation by an experienced and well informed bondholder prejudiced our position in the negotiations, as one of the ‘’gives’’ the Czechs made was in accepting the late presentation.’’  John R. Petty went on to note: ’’The Inland Bonds were held by Czechoslovakians and were to have been surrendered to the Czechoslovak Government in 1936 pursuant to foreign exchange regulations.  According to the Czechs, some of these retired bonds were seized by the Nazis and were subsequently either resold or stolen from the Reichsbank during the fall of Berlin. They are not subject to further redemption.’’[Author’s note: Why hadn’t these ‘retired bonds’ been cancelled? In fact, by the outbreak of war, most had been!].

On March 10th, 1987, Kenneth M. Spang, Co-Chairman of the Bondholders’ Committee sent a more comprehensive Evaluation of the offer. Mr. Spang prefaced his Evaluation with the observation that now that the offer had been publicly announced and recommended by the FBPC, bond holders cannot hope for an increased payout.

Once again, the discrimination against the First Bohemia Glass Works, Inland Bonds and Augstein Bonds was noted by the Bondholders’ Committee. In particular:

         ◦   First Bohemia Glass Bonds.  ‘’The ‘’Council’’, during its recent negotiations had indicated to the ‘’Committee’’ that it expected that such bonds were to be included.’’  
             ◦   Inland Bonds. The Bondholders’ Committee noted a statement on February 15th,1939, by Mr. Kalfus, the then Czechoslovakian Minister of Finance, stating that holdings of the Czechoslovak State loan (obtained post 1936) had been converted against bonds of the 4 ½% Unification Loan and subsequently cancelled. In other words there were few, if any, of these bonds left to be ‘’seized by the Nazis’’ or ‘’stolen from the Reichsbank’’. The overwhelming majority of the ‘Inland Bonds’ now in foreign hands, would have got to America carried by Czech émigrés prior to the 1936 foreign exchange regulations. US dollar bearer bonds, issued by the Czech State and freely traded in New York, would of course have been a very logical and completely legal way for Czech’s to transfer their life savings to America.
                 ◦   Augstein Bonds. The Bondholders’ Committee reiterated the point that the sale of these securities had been ordered by the New York Supreme Court. If the intention of the Czechoslovak State had been to retire the bonds they should have acted more promptly to have them cancelled. You cannot retrospectively cancel securities.
A number of general points were also included in the Evaluation:

 ‘’A government which has issued bearer bonds in the New York market, may not arbitrarily select those to whom it shall make payments, when unmarked bearer bonds are traded in the New York Market.’’ In a footnote, the following additional point was made: ‘’In the bond settlement offers of Germany and Austria, a Validation Law which was approved by the U.S. Senate was required to invalidate certain bonds – not the unilateral action of the debtor nation.’’

‘’Czechoslovakia’s ‘’capacity to pay’’ and/or ‘’capacity to transfer’’ are more than ample…to pay its American bondholders.’’
‘’The U.S. Government within the past two years transferred gold with a current value of over $400m paper dollars to the Czech Government…Accordingly, the Czech Government has received from the United States Government gold valued at 100 times the total value of Czech dollar bonds outstanding in 1967!’
 The Czech government had settled the Sterling tranche of the State Loan issued in London ‘’on a grossly better basis’’. ‘’In 1960, the Czech Government offered to settle the Sterling bonds in default at 75% of their face value. The present value of $750, if paid to American holders of $1,000 gold bonds in 1960 today would, with interest, equal or exceed $2,250 per $1,000 bond, not $980 if parity were to result!’’
 The Bondholders’ Committee also argued that ‘’the offer needs to be extended indefinitely (perhaps, one year at time) as has been customary.’’[Author’s note: It is common for such offers to be periodically re-opened, but not indefinitely]. They went on to add: ‘’It is patently absurd for a debtor government to publish a notice (or two) in a newspaper (or two), requiring all bondholders to respond in 365 days or in effect have their bond claim destroyed. The offers must be reopened effective December 30th, 1987 and extended thereafter from time to time. The debtor has no legal right to unilaterally alter payment terms, on bearer bonds issued in the New York market and publicly traded on the New York market.’’

The Bondholders’ Evaluation of the settlement was presented to the FBPC at a meeting, on March 12th, 1987, between Mssrs. Spang and O’Connor; representing the Bondholders’ Committee; and Mssrs. Petty and Dine from the FBPC. In a memo from the meeting, dated March 19th, Richard Dine noted that: ‘’While  agreeing with the Council’s recommendation that bondholders should accept the basic (98% of face) offer as recommended by the Council, he felt the other terms of the settlement were not appropriate. In particular, Augstein, Inland, and First Bohemian Glassworks bonds should be treated no differently…’’. Late presenters shouldn’t be penalised given that ‘’the Czechs will have free use of the bondholders’ money until they are presented for redemption.’’ It was also noted that ‘’the amounts of money necessary to resolve these outstanding items was small relative to the Czechs’ ability to pay’’.

Response of the FBPC

There is no indication that FBPC disagreed with the points made by the Bondholders’ Committee at the March, 19th meeting. This was, after all, a former President of the FBPC (Mr. Spang) making the points to the current president (Mr. Petty). Indeed, ‘’Mr. Petty replied that the Glassworks and late-presentation issues remain open. He indicated a willingness to have further correspondence with the Czechs on these matters’’.

Most interestingly, rather than argue the points with regard to the Augstein and Inland Bonds, John Petty emphasized the weak negotiating position of the council: ‘’It was better to accept this compromise and to provide a generally favourable settlement for the bondholders, rather than stand firm and likely never resolve the bondholder claims.’’

Mr Petty then explained ‘’that two circumstances weakened the Council’s bargaining position: (1) The U.S. Government had refused to include the bondholders in the Government-to-Government settlement. Once the gold was returned (over Council objections), the Czechs had little incentive to satisfy the Council’s demands. (2) Bondholders who presented bonds after the August, 1985 deadline. From conversations with the Czechs, it appeared that the Czech Government had based its budget for the settlement on the amounts received prior to the deadline. With over $500,000 in bonds presented after the deadline, there was little room left for manoeuvring on the budget.’’ The Czechoslovak Government did, of course, know directly from its Paying Agent, the number of ‘late-presentations’ before signing the Final Settlement.

Evidence of Underfunding - ‘’We need additional money’’.

By April, 29th, 1987 a report sent to the FBPC by the Czechoslovak Government’s Paying Agent, Irving Trust, indicates a problem funding the Agreement. The report had been sent to the FBPC in an attempt to get the FBPC’s help. By this time, some $1,104,602 had been paid out, there was just $17,419 left in the money account, but $136,200 face value of bonds to be paid. The report bluntly noted: ‘’We need additional money’’.

The terms of the Final Settlement committed the Czechoslovak Government, not later than December 29th, 1986, to pay an amount corresponding to approximately 80% of the aggregate principle amount of the bonds to its paying agent. Given that the sums paid out by Irving Trust, as at April, 29th, correspond to roughly 80% of the aggregate principle amount (in table 1), it is fair to assume that the Czechoslovak Government did make that payment. The terms of the Final Settlement (Section 4) did, however, commit the Government to deposit additional funds, as shall be required:

‘’The Government will, from time to time, deposit such funds with the paying agent as shall be required to make payment with respect to the expenses related to the Settlement’’. [‘’Vláda složí čas od času u platebního agenta prostředky, které budou vyžadovány k úhradě výloh majících vztah k vypořádání.’’]

Clearly, by the end of April, something had gone so seriously wrong, that the Czechoslovak Government’s Paying Agent, Irving Trust, had had to correspond directly with the FBPC. Furthermore, Irving Trust noted that Augstein bondholders had requested no payment be made on their bonds and the return of their bonds, while a new group of ‘late-presenters’ had emerged. While the $500,000 of late-presentations made after the deadline for submitting bonds, but before the announcement of the final offer was announced, had already been identified and included in the offer, a smaller group of late presenters had emerged during the actual period of the final offer. Irving Trust noted, ‘’We have received $30,000 of bonds from various holders that are not eligible for payment. These bonds were not presented for the 2½% payment.’’

John R. Petty, President of the FBPC, wrote directly to Dr. Frantisek Kundrna at the Ministry of Finance on May 1st, 1987: ‘’Irving Trust requires additional funds. If I can assist in improved communication between yourself and Irving to avoid this problem in the future, please let me know.’’

On May 6th, 1987, John Petty attaches the letter sent to Dr. Kundrna to correspondence sent to Ambassador Julian M. Niemczyk at the US Embassy in Prague: ‘’I would be most grateful if you could arrange to have this made directly available to Dr. Kundrna. Thank you for your assistance in this matter.’’

On June 3rd, 1987, more than a month after the Paying Agent first flagged to the FBPC the underfunding problem, John Petty writes again to Dr. Kundrna at the MOF: ‘’The Ministry of Finance should as soon as possible pay over to Irving Trust the amount necessary… to cover the $136,200 face amount of bonds Irving holds but does not have the funds to pay, as noted in the report I sent you on 1 May.’’ In the same letter, John Petty suggested that the MOF should also pay over approximately $120,000 to Irving Trust as ‘’the amount necessary to pay all bonds eligible under the present offer as if all bonds had already been presented.’’ The message was clear: The Czechoslovak Government needed to contribute a further $250,000 in order to meet its current and future obligations under the Final Settlement.

John Petty also brought-up the issue of the $30,000 of ‘late presentments’; requesting ‘flexibility’ in qualifying late submissions from small individual holders. In a covering letter, to US Ambassador Niemczyk, also dated June 3rd 1987, Mr Petty noted: ’’Many of the bonds presented late were likely purchased by Americans of Czechoslovak origins who purchased these at their local churches or societies to support the ‘’Motherland’’.’’

Mr Petty concluded his letter to Dr Kundrna thus: ‘’I urge you to undertake the procedure I have outlined above so that we may complete the settlement process with due regard for the interests of your Government and for the small holders of the dollar denominated bonds.’’

As at June 3rd, 1987, the FBPC archives indicate that the Czechoslovak State hadn’t made the additional Funding available, as it was required to, under the terms of the Final Settlement. The fact many eligible bonds still remain in circulation strongly suggests that the additional funding never happened. It also explains the evasive behaviour of the Czech MOF; when asked: Was the agreement honoured? The response: ‘’…an agreement was signed’’ sounds very much like legal speak for: It wasn’t!
Americans of Czechoslovak origin were amongst those who got nothing in the Settlement. Vignette on the share certificate of the Czechoslovak Commercial Corporation of America (Series c), issued 1926. Illustrated by Emanuel Bohač. The company aided the emigration of Czechs to America. Note the symbolism of the Czech émigrés on the right, next to the Bohemian flag, with their luggage, the rich and fertile land that awaits them, and the Statue of Liberty that beckons. Maybe there are some dollar bonds in that trunk? Illustration courtesy: – The Gift of History

The Diplomatic Bungling Gets Worse

On February, 6th 1987, i.e. before the money had run out on the Paying Agent’s account, the Czechoslovak Government wrote requesting confirmation from the US State Department that the Czechoslovak Government had complied with its obligations under the February 2nd, 1982, Diplomatic Exchange of Letters.

On April 24th, 1987, John Emert, at the FBPC, received a phone call from Jeff Kovar, at the US State Department, explaining the Czechoslovak’s request for confirmation. In response, on May, 15th, 1987, the FBPC sent a written reply to H. Rowan Gaither at the US State Department:

‘’The FBPC believes that, notwithstanding the delay in reaching a settlement, and subject to payments actually being made according to the terms of the Agreement, the Czech Government has substantially fulfilled its obligations under the 1982 exchange of letters.’’ [Underlining added]

A revised draft of the response the US State Department proposed sending to the Czechoslovak Government remains in the FBPC archives. Dated June 9th, 1987, remarkably, it reads:

‘’…the United States considers that the obligations stipulated in the exchange of letters of February 2nd, 1982, have been met.’’

With the formal offer period still not over, and with the US Government fully aware of the funding issue, the FBPC’s qualified response had become an unqualified statement that obligations ‘’have been met’’.  Then came the diplomatic ‘washing of hands’:

‘’In light of the conclusion of the settlement agreement between the Government of Czechoslovakia and the Foreign Bondholders Protective Council, the Government of the United States does not consider any remaining claims relating to bonds covered by the settlement agreement to be matters requiring discussion between the Government of Czechoslovakia and the Government of the United states.’’

Just when diplomatic support was most needed; the sending of such a letter would have turned the FBPC’s weak bargaining position into a hopeless one. There would have been little incentive for the Czechoslovak Government to keep funding the Settlement, to accept late-presentations, or engage in serious discussions with regard to those bonds discriminated against in the Settlement. It was effectively ‘game over’.

‘Augstein’ Bondholders Try to Sue

Those qualifying for the basic 98% (of face value) Settlement accepted it. Holders of the Augstein bonds, offered just 20% of face value, generally didn’t accept the offer and tried to sue both the Czechoslovak State and FBPC in New York. In Jacob Oliner, v. Czechoslovak Socialist Republic and Foreign Bondholders Protective Council (1989), the Czechoslovak State successfully claimed diplomatic immunity. As a result, the action against the FBPC had to be dismissed as well. It was clear, those discriminated against in the Settlement had no effective means of redress.

Could Things Have Been Handled Better?

Clearly returning the 18 ½ tons of gold prior to any bondholder settlement was a huge diplomatic blunder. The US Government had handed over its trump card to a debtor who had a history of default. The agreement should have been contemporaneous with the US/CSSR Settlement of Certain Outstanding Claims and Financial Issues. The fact it wasn’t, and commitment to begin negotiations with the FBPC was relegated to an Annex to the Agreement, indicates the lack of importance diplomats attached to this issue. Even withholding a small portion of the gold, until final Settlement of the bond claims, would have profoundly strengthened the FBPC’s hand.

When it was clear that negotiations were floundering and that large numbers of bondholders were being discriminated against, the FBPC had the option to escalate the issue through diplomatic channels. In the 1982 exchange of letters the following provision was made:  ’’…if no agreement was reached within six months of the settlement date referred to in the US/CSSR Agreement (approx. August 2nd, 1982), the matter would be discussed through diplomatic channels.’’ One can only assume either the FBPC was reluctant to hand the matter back to the State Department and/or officials at the State Department were reluctant to accept the consequences of their actions, i.e. prematurely returning the gold.

Another obvious option was also available: The FBPC didn’t have to recommend the offer. While this risked no offer being made, recommending the offer gave legitimacy to a deeply inequitable Settlement. A unilateral offer made by the Czechoslovak State to Sterling bondholders in 1960 was accompanied by published notices, from the British Council of Foreign Bondholders (the British equivalent of the FBPC), condemning the offer.

Ultimately, from 1989 onwards, the FBPC became inactive. As a mechanism for settling bondholder disputes, it had become a completely discredited institution. A victim of its own capricious behaviour.

The Czech MOF’s Current Position

In the only response the author received from the MOF, they noted ‘’should the claims be governed not by Czech law but by the state of New York, where the bonds should have been redeemed, the statute of limitations for the bonds would be 6 or 20 years. Thus, the bonds would be barred by the statute of limitations in 1986 at the latest.’’⁹ Really? Given that these bonds have never been cancelled, they remain outstanding until the obligations they represent are fulfilled. The liability for a bond doesn’t end with its maturity date if the bond is in default. Indeed, the draft of the US State Department letter sent to the FBPC, dated June 9th, 1987, does remind the Czechoslovak State ’…the Government of Czechoslovakia is released only from claims relating to those bonds…for which acceptance of the offer is made.’’

Spot the Difference? Left: A valid City of Greater Prague Bond, issued 1922. Illustration Courtesy: Right: An example of a cancelled City of Greater Prague Bond, issued 1922. Note cancelled bonds are either stamped cancelled or have holes punched in them.  
Source: Ebay.

Clearly the statute of limitations cannot also be 1986 for bonds subject to an agreement finalised in 1986. It is an agreement that the Czech authorities would rather ignore and have sought to hide from bondholders.

Additionally, the 1984 Memorandum of Procedure, stamped as accepted by the bondholder, committed the CSR Ministry of Finance to ‘’make reasonable provision for the late presentation of bonds’’ (Takové vypořádání bude obsahovat rozumné opatření pro případ pozdního předložení dluhopisů) in the Final Settlement.  Failing to authenticate bonds and withholding the terms of the relevant agreements doesn’t seem to the author like ‘reasonable provision’ or even reasonable behaviour! Strangely, a specific provision for the late presentation of bonds wasn’t in the Final Settlement despite it being specifically mentioned in the initial memorandum accepted by bondholders.

How Cheapskate Can You Get?

John R. Petty, President of the FBPC, indicated in his June 3rd, 1987, letter, that just $250,000 of additional money was required to fund the agreement.  It seems incredible that the Czechoslovak State would have chosen to put its reputation on the line for such a trifling amount of money. However, as we shall see, such a decision would have been entirely consistent with previous behaviour.

Czech Authorities Face a Dilemma

With the evidence strongly suggesting the Czechoslovak State reneged on what was already an incredibly one-sided agreement (in the Czech Republic’s favour), the current Czech authorities now face a dilemma because, strictly speaking, these bonds were all linked to the price of gold.  The $256,200 of outstanding bonds to be paid, as at June, 1987, represents $256,200 in gold coin at 1922 gold prices …and gold, as we know, has dramatically risen in value over the intervening 90 years and even since the MOF committed to its agreement with foreign bond-holders (chart 1). That’s leaving aside the subject of accrued interest.

Chart 1: The Gold Price Has Risen 60 Fold since 1922 and 3 fold since 1986
Source: AKRO investiční společnost, a.s., Bloomberg

Even if we ignore the gold link and just focus on the size of the liability under the 1986 Settlement there is a potential problem. Though the ballpark figure $250,000 seems insignificant, either then or now, add to it penalty interest over 30 years and the sum becomes significant. For purposes of illustration, retrospectively applying 10% annual compound interest over 30 years, $250,000 becomes $4.35m. At 15% compound interest, the figure becomes $16.5m. Interestingly, in 2013 the Czech government implemented legislation that transposes EU Directive 2011/7/EU on fighting late payment in commercial transactions. The aim of this legislation is to improve payment morals in commercial transactions!

Is that the reason Czech authorities daren’t revisit the issue; because of a large potential liability? Or is it the stigma of a ‘selective default’? Or is it the natural reticence of a party who has reneged on their word? Divulging the terms of the 1984/86 agreements would probably immediately trigger legal actions against the State. Investors can hardly sue if they don’t know what they are entitled to! Interestingly, post the 1986 Settlement, the Czech State, its agencies and City of Prague have issued bonds. Their prospectuses make no mention of the 1984/86 Settlement and the obligation it represents.  Perhaps it’s a combination of the aforementioned issues that explains the lack of transparency and the administrative hurdles with regard to authenticating the bonds. Organisational inertia may also have played a part: having made a bad decision 30 years ago, the Czech authorities are reluctant to revisit the issue.

What Default? What Memorandum?



Top Left: Collective Amnesia. The 1994 City of Prague Offering Document makes no mention of the City’s earlier loan (Top Right) or the issuer’s earlier default. Nor is any mention made of the 1984 Memorandum or the 1986 Final settlement. The Offering document claims to ‘’contain all information which is material in the context of the issue…and is not misleading’’. The author, a professional Fund manager, believes an issuer’s prior default and the non-disclosure of a recent bondholder’s agreement to be material omissions. In fact, it is difficult to imagine more material omissions. Interestingly, one of the issuing banks, Kidder, Peabody, was one of the 3 US banks involved in the original 1922 State Loan (Bottom Right); also defaulted on in 1952 and also subject to the same 1984 Memorandum. Similarly, the Czech Republic’s Offering Documents (Bottom Left), acting through the Czech MOF, makes no reference to the history of default (in 1952 on dollar bonds & 1959 on Sterling bonds) or the 1984/86 agreements.  Source: Bloomberg, Wall Street Journal, June 6th 1922, New York Times, April 6th 1922.

Pledged Assets Count For Nothing; either Then or In Restitution

Readers will be interested to know that all these bond issues were secured against pledged assets. The City of Prague loan, 1922, apart from being a direct liability and obligation of the City, was secured by a specific mortgage on the electric, gas and water works, and tramways owned by the City. Similarly, The City of Carlsbad Loan, 1924, apart from being a direct liability and obligation of that City, was secured by a general lien on all the properties owned by the City. From 1946, the Czechoslovak State guaranteed the payments on the Carlsbad loan.
Finally, the Czechoslovak State Loan, 1922, was secured by a first specific charge on the receipts from the customs duties and on the net profits of the tobacco monopoly. A follow-up issue in 1925, had the additional security of a first specific charge on the revenues from excise duties on sugar and alcohol.

Why was there so much collateral behind these loans? Gaspard Farrer, a Director at Barings, explained to his friend at Kidder, Peabody & Co:

‘’Unless we can obtain the security for which we have asked we prefer to let others take the business. Czecho-Slovakia is but a state of yesterday, and all Central Europe is in a state of fluidity, and a loan or charge which was not directly and unquestionably sanctioned by the representatives of the State would run a great chance of being upset in case of further political changes in that part of Europe’’¹°.
So concerned were the bankers that they insisted a special Act go before parliament pledging the security for the State loan. Such an Act was at first resisted as it was seen by all political parties as a humiliation of the Czechoslovak nation. To try and stave off the need for a special Act of Parliament, on 31st January, 1922, Edvard Benes announced that he had formal approval of the MOF and gave ‘’definitive’’ assurance about the state security for the loan¹¹.

Not entirely convinced by this assurance, the bankers continued to insist on an Act of Parliament. Eventually a general law was passed, authorising the government to take loans abroad and, if needed, to provide guarantees in the form of certain types of State incomes. In the ‘give and take’ of the negotiations, at the request of both the MOF and Prime Minister Beneš the size of the loan was doubled from £5m ($25m) to £10m ($50m).

Presidential Endorsement

The background to the Czechoslovak State Loan of 1922 is particularly noteworthy as it harks to the very roots of Czechoslovakia as an independent nation. The Czechoslovak State had emerged as a major winner in the aftermath of World War I. Not only did it gain its independence. With a population of 13 ½ m, and a landmass almost as large as England and Wales, the new Republic encompassed about 75% of the principle industrial centres of the former Austro-Hungarian Empire.
Whilst the 1918 Loan of National Freedom (půjčka národní svobody) represented the first borrowing by the newly formed Republic, the 1922 foreign loan represented formal recognition of the Czechoslovak State by the Great Powers, e.g. Britain, France and America. From an international perspective, the Czechoslovak bond issue of 1922 was a trailblazing transaction as it was the first successful attempt by any central-European state to refinance its debts in the international capital markets after the end of World War I. The overall size of the offer was $50m (then equivalent to £10m), with an initial $14m being sold in New York, £2.8m in London and £0.8m in Amsterdam.

The political and economic importance the Czechoslovaks attached to securing the 1922 State Loan can be measured by those involved (and also by those who weren’t). During the period 1919-1922, both Czechoslovak Prime Minister, Edvard Beneš, and President Masaryk’s son, Jan Masaryk, were intensively involved in the negotiations to secure the foreign loan. More than once, Beneš travelled to London for meetings with, amongst others, the Governor of the Bank of England and bankers from Barings, Rothschilds and Schroders. Copies of a letter signed by the Beneš were made available to potential investors. Edvard Beneš praised the extensive help from Jan Masaryk in the negotiations, who spoke flawless English (his mother was American). For their part, correspondence shows, the British bankers viewed Jan Masaryk as a ‘’highly trustworthy person’’. Highly respected in America, the Masaryk family counted the American President, Woodrow Wilson, as a close friend.

Men of Integrity. This photograph, taken in 1926, while President Masaryk was visiting the family of industrialist Barton-Dobenin. In the centre is Prezident T. G. Masaryk, to his left (in the boater hat) stands Edvard Beneš, and behind them Jan Masaryk.
T.G. Masaryk died in September 14th 1937 of natural causes. On March 10th, 1948, his son, Jan Masaryk was found dead, dressed only in his pyjamas, in the courtyard of the Foreign Ministry, below his bathroom window. A Prague police report in 2004 concluded that Masaryk had been thrown out of the window to his death. Edvard Beneš died on September 3rd, 1948, a broken man, following the communist coup. Photo courtesy: Nové Město nad Metují Castle

Involvement with the loan didn’t end with the President’s son. In a paper by Prof. Eduard Kubů and Dr Jiří Šouša, The Czechoslovak Loan of 1922…¹², the following is recounted:

‘’After attending a strictly secret meeting with P.Bark, the CEO of the Bank of England, the president wrote a letter to the [then] Prime Minister Antonín Švehla in November 1924, in which he requested an immediate replacement of the Minister of Finance because the Minister Bohdan Bečka had sent a negotiator to London to negotiate the second tranche of the loan and this negotiator was the representative of one of the leading domestic financial institutions and he had allegedly demonstrated such ‘’provincialism’’ that he not only had not received the loan but he also had damaged the reputation of the country. In conclusion, Masaryk summed it up as follows: ‘’In a nutshell, this action by Bečka caused great damage to us and is an evidence of his utter incompetence. ‘‘‘‘

One can only speculate what President Masaryk’s reaction would have been to the Ministry of Finance’s defaulting of the dollar tranche (in 1952); When just $2.7m was left outstanding, the sterling tranche (in 1959); when just £240,000 was left outstanding, and the under-funding of the bondholders’ agreement (as at June, 1987); when an additional $250,000 was required!
From the bondholders’ perspective it is interesting to note that, despite the impressive list of assets pledged, the assurance of the Czechoslovak MOF, the special Act of Parliament, the endorsement of two Czechoslovak Presidents (one current and one future), neither in Communism nor in post-Communist restitution, have any of these pledges actually benefitted bondholders.

How Were The Funds Utilised?

It is easy to focus on the obligation these bonds represent on their borrowers, however, it is important not to lose sight of the fact that the Cities of Prague and Carlsbad, and the Czechoslovak State in general, benefitted enormously from the monies raised from foreign investors. The pooled nature of government and municiple revenues, from many different sources, means identifying the specific source of monies for a specific project is difficult. The Offering documents do, however, indicate for what general purposes the monies raised were to be utilised.

The City of Prague used the $7½m raised from its dollar bond issue for ‘’the construction of an electric power station, the purchase and erection of power plants, and the extension of water work and of the tramways throughout the former suburbs’’. The funds raised from foreign investors therefore had a profound and enduring positive impact on the City of Prague.

Similarly, the $1.5m raised from the City of Carlsbad loan was used for ‘’permanent and revenue producing municipal improvements’’. Arguably, the most significant investment by Carlsbad City Council was the preliminary work to locate a site for a new airport, the development of which was then funded by monies from the Czechoslovak State. Today, the airport boasts direct flights not only to Prague but to Moscow and St. Petersburg. As a consequence of these connections, present day Karlovy Vary (Carlsbad) prospers as both a tourist destination and as home to a large Russian speaking population.

Top. Immediately after the successful 1924 fund raising, in conjunction with the nearby town of Marianske Lazne and latterly the Czechoslovak State, the City of Carlsbad started exploring ways to develop improved air links to the region. The resultant airport, pictured, proved transformational for the fortunes of the City of Carlsbad, which is now one of the most visited cities in the Czech Republic. Photo Courtesy:

 Left: A major beneficiary of the $7.5m raised from the Greater Prague loan was the tram network which expanded into more outlying areas of metropolitan Prague, such as Dejvice, Nusle and Žižkov. By 1927, the length of the network exceeded 100 km. Prague residents have long enjoyed the benefits of one of the best public transport infrastructures in Europe. Photo:

According to Prime Minister Beneš’s letter which accompanied the Czechoslovak State’s bond offering: ‘’The proceeds of the loan will be applied to essential works of public development, railways, canals and similar purposes, and the repayment of temporary advances in connection therewith’’. These temporary advances included the so called £2m ‘’flour loan’’, advanced by the Allies to the new Czechoslovak State, immediately after WWI, in order to stave off the risk of famine and malnutrition.

The success of the bond offering undoubtedly helped both the economic and political stability of the new Republic. The incoming foreign currency also helped stabilise the currency and created a financial ‘reserve’. It also created a positive backdrop for later municiple, i.e. Prague & Carlsbad, and corporate issues, e.g. Brunner Turbine & Equipment Company 1925 (První Brněnská strojírenska společnost) which followed.

With a National debt, including this loan, calculated to be less than $53 per head; the debt burden wasn’t overly onerous. Furthermore, recognised as one of the ‘Allied and Associated Powers’, the new Republic was not subject to the control of the Reparations Committee (which could exercise considerable control over the state revenues and assets of ex-enemy states). As a consequence of its industrial base and the large and well timed foreign bond issues, the Czechoslovak Republic, during the inter-war years, became an industrial powerhouse. The period is now widely acknowledged as the ‘belle epoch’ for Czechoslovakia.

The British & Dutch Experience

The discussion so far has centred on the 1984/86 Agreements which relate only to the dollar-denominated bonds offered in New York. The Czechoslovak State loan, and the City of Greater Prague loan, also saw sterling tranches offered for sale in London (and in the case of the Czechoslovak loan also in Amsterdam).

Payments on the sterling issues of the Czechoslovak State loan 1922 and City of Greater Prague Loan 1922 were kept up until the autumn of 1959, when payments suddenly and inexplicably stopped. Both loans had been due to be redeemed during the course of 1960. Incredibly, the Communists had defaulted on these loans, when just £240,000 was left outstanding! [Yes, you read correctly].

Joseph Wechsberg’s book, The Merchant Bankers¹³ includes the recollections of Sir Edward Reid, a banker at Barings, with regard to the Czechoslovak default:

‘’Barings sent a letter, and another one. No answer. It sent telegrams which remained unanswered too. Individuals act that way but it is hard to believe that governments may behave like ill-mannered children. At last, Sir Edward Reid took a plane to Prague. There he stepped out into a strange, Kafka-esque world. He couldn’t find anyone in the bureaucratic labyrinths who knew or admitted to know anything about the 1922 State loan. The loan didn’t seem to exist. Maybe it had never existed. [It would appear little has changed since Sir Edward’s 1959 visit!].

Sir Edward had several interviews with officials of both the Ministry of Finance and the State Bank but they were ‘’entirely unsatisfactory.’’ An official admitted finally that the Czechoslovak government still owed £240,000 in respect of the unpaid bonds still remaining in the hands of the public. He told Sir Edward they had plenty of money available to pay these bonds but said that they were not going to pay their debts to ‘’the capitalists in the City of London’’.’’

Joseph Wechsberg commented: ‘’That the government of a once proud nation would risk the loss of its financial reputation for a paltry two hundred thousand pounds is, of course, inconceivable to [Sir Edward Reid] the godson of King Edward VII.’’

In the end, after pressure from the British government, in 1960, the Czechoslovak government announced a unilateral offer representing 75% of the outstanding bonds face value. In response, the British Council of the Corporation of Foreign Bondholders (CFB), on the same day the unilateral Czechoslovak offer was made, published an announcement criticizing the action of the Czechoslovak Government for inflicting ‘’unjustifiable loss on its Bondholders, who had every reason to expect that the small amounts needed …would be forthcoming’’. With little alternative, most holders of the sterling bonds accepted the offer. Today, only £13,000 of the Sterling denominated Czechoslovak State loan, and £7,400 of the Sterling denominated City of Greater Prague Loan, remains outstanding.

Why Would the Czechoslovak Government Renege on its Word?

We can only speculate as to why the Czechoslovak Government might have chosen not to have fully honoured the Final Settlement. The most obvious reason, is that they didn’t have to. Once the 18 ½ tons of gold were returned to the Czechoslovak State, the US government lost any leverage to ensure the FBPC settlement was followed through.

Protecting the reputation of the Czechoslovak government doesn’t seem to have been an objective. Meeting notes, from a Sept., 23rd, 1982 meeting in Prague left the FBPC representative, a Mr. Gray, with the impression: ‘’…the Finance Ministry is not negotiating with us merely to show the world that the obligation of the Czech Government is sacred, but rather more to make sure the U.S. Government does not assert a violation of the spirit of the recent accords with some yet unknown sanction.’’

 It is also possible that there was also a political motive for the discriminatory nature and probable non-fulfilment of the 1986 Agreement. The hard-line stance of US President Reagan against the Soviet Union, though ultimately leading to the Soviet Union’s implosion, may have antagonised the Czechoslovak Communist Government of the time. Dollar Bondholders may therefore have been victim to a petty act of political spite.

The Need for a Renewed, Broadened and Updated Offer
The issue of the outstanding Czechoslovak dollar bonds, and the 1986 Bondholders’ Agreement, should have been addressed in the period 1989-93 immediately post the ‘Velvet Revolution’ but prior to the issuance of new bonds. Instead an opportunity to honour the Final Agreement and compensate discriminated bondholders, at negligible cost, was missed. The split of Czechoslovakia on 1st January, 1993, will have further complicated the situation.

The author hopes that after considering the historic background behind these bonds, and the 1986 Final Settlement, the Czech Government will voluntarily make good on its word and renew, broaden and update the offer. The activities of the Ministry of Finance are of course subject to Ministerial and Cabinet oversight. A fresh look at the issue, not least now that the key facts are in the public domain, may well produce a positive result. By renewing a prior offer, difficult issues related to these securities gold link and collateral backing can be avoided.

The signed Final Settlement still exists. All the Czech Ministry of Finance has to do is honour it. Payments may be 30 years late, but it is better to make them late than never! Given the length of time that has elapsed, and the evident skulduggery of officials at the MOF, both past and present, it seems only right and proper statutory interest be applied to the late payment. The MOF isn’t itself, above the late-payment laws it purports to support. Only by applying penalty interest can we hope positively to change behaviour at State Institutions. From that perspective, both Czechs and foreigners would benefit.

The other good news is that very few Pre-war dollar bonds remain outstanding. The combination of gradual re-purchases in accordance with the sinking funds linked to each issue, the exchange and cancellation of $12.84m Czechoslovak State bonds in 1939, alleged purchases post default, and of course the 1987 repurchase of $1.15m, means only $1.91m of bonds remain outstanding (Table 2).

The $1.9m face value of bonds outstanding represents a theoretical number, assuming all outstanding bonds were suddenly found. In reality, those that weren’t presented in the 1984/1986 offer were either lost, or had been excluded from the offer.

Table 3 gives the estimated cost of making a broadened, renewed and updated offer. The estimate is highly sensitive to the assumed number of bonds that would actually be presented for payment and the penalty interest rate applied. Assuming 15% penalty interest over 30 years, we get an approximate figure of $36m. The final piece of potential good news is that if the MOF did, after all, make the additional funding available in 1987, as it was obliged to do under the 1986 Agreement, that would reduce that figure by half.

Source: FBPC Archives, Author’s estimates. Nb. Only $1,000 of First Bohemia Bonds were presented during the 1986 offer. This may have been just a ‘symbolic’ offering as these bonds were never formerly requested for presentation. The author assumes that 25% of all outstanding Bohemia Glass bonds would be presented. Adjustment has been made for the acceptance of the 1986 offer by one Augstein bond with a $1,000 face value. It is highly likely that over the last 30 years certain bonds have been lost and others found. In the author’s opinion, the $36m represents a worst case scenario. A 10%p.a. penalty rate would dramatically reduce the cost from $36m to $9.5m

You will notice that allowance has been made for submissions of any outstanding Sterling bonds. A negligible number remain outstanding, but it would be inconsistent to exclude bonds only because they are denominated in Sterling rather than dollars. An ‘other’ category has also been added in case other outstanding foreign currency bonds are identified. These could then be studied to ascertain their eligibility or otherwise. If other eligible, probably corporate, issues do exist, the number of outstanding bonds will probably be significantly lower than the mainly State and Municipal bonds already identified.        

As we approach the centenary of the founding of the Republic; a renewed offer would be hugely symbolic. Indeed, the offer period could overlap the centenary celebrations. The fact some of these early bonds remain outstanding represents an opportunity for the Czech Republic to reconnect with its past in a positive way and to reassert the values the Republic was built on. The message would be clear: The Czech Republic is ‘good for its word’ down to the very last dollar.              

Legal Redress

The author considers himself a Czech patriot; by choice rather than by birth. As such, it is hoped legal redress will be unnecessary. Nevertheless, numerous legal/regulatory options remain open to bondholders.

The Public Defender of Rights (Ombudsman) is an independent state body. The mission of the Public Defender of Rights is to assist individuals and legal entities in defending their rights and freedoms in relation to the acts of public administration authorities that violate the law or principles of a democratic legal state and proper administration, as well as in relation to complaints concerning the failure of such authorities to take action, procrastination and improper or unethical behaviour or conduct on the part of public officials.

Although with limited formal powers, the Czech Presidency, both then and now, carries significant informal power. The reputations of two Czech Presidents, as well as the entire Czech Parliament, are intimately tied to these loans, especially the State Loan. Intervention by Prague Castle cannot be ruled out. Rather unflatteringly, at the time of the 1922 State Loan, Bank of England Director, Spencer-Smith, reputedly held the opinion, one cannot negotiate with the Czechs otherwise than by ‘’putting a gun to their heads.’’ Spencer-Smith would be relieved to know, the current President is believed to have a Kalashnikov for just that purpose.  

Should legal action be necessary numerous laws/Listing Regulations may have been broken by a multitude of parties, and in different jurisdictions. The main culprit is clearly, the Czech MOF. Sovereign immunity and the Statute of Limitations may prove a fig-leaf against prosecution.
·       Because the dollar bonds were issued, due for redemption, and the 1984/86 Agreements were signed, in New York: New York State Law most probably applies. According to a Commercial Lawyer, with a successful track record in actions against the Czech MOF, it is possible to try a case in Prague, subject to New York Law. A case under Czech law may also be possible.

·       The bonds remain outstanding and haven’t been cancelled. Under New York law, The Statute of Limitations probably does not apply to the 1986 Agreement. The continued withholding of key documents, consenting bondholders may reasonably be entitled to review, is another factor. The analogy can be made with Cinderella’s wicked stepmother who tries to hide a will so Cinderella doesn’t inherit from her father. When years later, while cleaning, Cinderella finds the will, of course Cinderella inherits, and we see the deceitful character of the Stepmother.

 In this case, Cinderella represents the mainly American bondholders who had faith in the new Republic. Cinderella’s father, are the founding fathers of the Republic. The will represents the 1984/6 Agreements. You can guess which institution represents the wicked-stepmother! [But is the Fairy Godmother hiding somewhere?]

·       A late presentation of bonds clause was also explicitly promised in the 1984 Memorandum accepted by Bondholders at the time.

The archive evidence also casts doubt on the legality and competence of actions taken by the US State Department, and the agent it chose to represent bondholders; the FBPC. American bondholders may feel the State Department has a case to answer. They might also feel the State Department should contribute to the settlement; particularly that part of a renewed settlement related to discriminated bonds.

‘’My Word is My Bond’’

So what of the outstanding dollar-denominated bonds? At the time of the signing of the original 1984 Memorandum, the Commercial Counsellor of the Czechoslovak embassy in New York was quoted as saying: ‘’We gain from this agreement morally, because we have fulfilled our obligations.’’¹⁴ Well did they? The evidence suggests not.

Given the discriminatory nature of the 1984/6 Agreements and the evidence suggesting the Final Settlement may not have been fully funded: The government should renew, broaden and update the offer. The 18½ tons of gold stolen by the Nazis, and returned by the Allies (America and Britain) in 1982, represented 595,000 troy ounces. This has a current day value of approximately $750m! Even in the unlikely event that $550,000 of outstanding bonds were presented for payment, including penalty interest over 30 years, it would still represent only  a fraction of what the allies returned to the Communists (and a fraction of the present day value of the dollar bonds the Communists defaulted on in 1952). It would also remove a stain that has blotted the reputation of the Czech capital market for more than 3 decades. It is meant as a constructive suggestion.

Let’s not forget, many of these foreign, mainly American, investors were Czech émigrés and patriots. Others just had faith that the newly formed state of Czechoslovakia was ‘good for its word’. As we head towards the centenary of the foundation of the Republic; it’s not too late to prove them right.

Jeremy Monk MBA, ASIP, BSc (Hons), DIC
Investment Director
AKRO investiční společnost, a.s.
Prague, Czech Republic

1st August, 2016

For the article in Czech, please visit:

¹Exchange of letters dated 2nd  February, 1982, between the Czech Minister of Foreign Affairs and Ambassador Matlock. This exchange of letters was included as an annex to the Agreement between the Government of the United States of America and the Government of the Czechoslovak Socialist Republic on the Settlement of Certain Outstanding Claims and Financial Issues.
²The New York Times, ‘’Czechoslovak Bonds’ Status’’, 2nd March, 1982.
³Coincidentally, when the Communist system fell in 1989, John Petty, signatory of behalf of the FBPC, continued his association with Central Europe by dispensing funds under the Bush Administration. By 1993/4, both the Czechoslovak State and City of Prague were issuing new bonds. The plight of the pre-war bondholders was diplomatically forgotten.
⁴The New York Times, ‘’Old Czech bonds To Be Paid In Part’’. 28th May, 1984. The same article quoted Officials saying: ‘’…bonds seized by occupying Nazis in Czechoslovakia during World War II that subsequently found their way into American hands, will not be considered legitimate.’’ The officials omitted to mention that, by February, 15th, 1939, bonds subject to the 1936 foreign exchange regulations had been exchanged into a crown denominated State Unification Loan (1936 ) and cancelled.
⁵As an aside, not so long ago, the author asked the US Federal Reserve to validate a pre-war Treasury bond. The request was dealt with promptly. Unfortunately, the bond in question was a forgery.
⁶Letter from MOF to author dated 18th January, 2016.
⁷The CNB has informed the author that it has no regulatory powers to force the Ministry of Finance to disclose any documents or information relating to historical bonds. Furthermore, the CNB scope of competence does not include dealing with state debt or alleged state debt.
⁸Unless otherwise stated, FBPC correspondence referred to in this article comes from Stanford University Libraries, Special Collections Department: Foreign Bondholders Protective Council Records. Box 50 Czechoslovakia: negotiation file, 1965-1988 and Box 51 Czechoslovakia: correspondence, 1981-1987.
⁹Letter from MOF to author dated 18th January, 2016.
¹°Orde, Anne, Baring Brothers, the Bank of England, the British Government and the Czechoslovak State Loan of 1922, 1991, pages 31-3, English Historical Review.
¹¹National Archives London, FO 371, NO 7384, C1535, Cable from Cecil to FO dated 1.2.1922
¹²Kubů, Eduard, Šouša, Jiří. The Czechoslovak Loan of 1922: Meeting Place of Financial Elite of London and Prague, 2010.
A Czech language history of the Czechoslovak State Loan, by Rudolf Píša, can also be found online:
¹³Wechsberg, Joseph, Merchant Bankers, 2014 originally published 1966. Pages 157-159.
¹⁴The New York Times, ‘’Old Czech bonds To Be Paid In Part’’. 28th May, 1984.

The author would like to a acknowledge the help of Tim Noakes at Stanford University Libraries who provided me with copies of the 1984 and 1986 original signed agreements between the Foreign Bondholders Protective Council and Czechoslovak state. The author acknowledges others may have previously reviewed these documents, but this is the first time the key terms of the 1984/86 agreements have been made public. A special thanks to Dr. Jan Červenka who took time out from a series of meetings at Stanford University to go through the post 1986 FBPC archives.
Thanks also to Radek Zábransky, at Karlovy Vary Airport, for outlining how development of the airport was funded and for the use of the archive photo. Holly Waughman, at the Bank of England Archive, for locating Dr Beneš’s letter accompanying the 1922 State loan.
This article does not constitute investment advice or a recommendation to buy or sell any security. The opinions expressed in this article are the author’s and do not necessarily represent the views of AKRO investiční společnost, a.s. Examples of the certificates illustrated in this article are held in the author’s private collection including the pre-war Czech dollar denominated bonds issued by the Czechoslovak State, Karlovy Vary (Carlsbad) and City of Greater Prague. For the completeness of disclosure, the author would like to note that his employer, AKRO investiční společnost, a.s., has been in long-term dispute with the Czech Ministry of Finance (MOF) over the allege