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Swiss help tackle Czech consumer debt mountains

A lot of Czech people having been living beyond their means Visum

Consumers who fail to pay back their loans in time face exorbitant interest rates in the Czech Republic. As a result many of them resort to criminal activities.

This content was published on November 7, 2011 - 14:25
Alexander Künzle in Prague, swissinfo.ch

The Czech justice ministry has launched an overhaul of the credit system hoping to ease the re-integration into society of former convicts. Switzerland is backing the reform as part of its aid to help eastern European countries transform into market economies.

Prague is arguably one of the most attractive cities for tourists and consumers in central and eastern Europe. But behind the glitter of shopping windows and fancy boutiques is another – ugly - reality.

Vaclav's story in a common one. The 40-year old father lived lawfully, getting used to a steadily rising income and growing consumer demands, until he was caught off-guard by the economic downturn.

In a few years his debts totalled about SFr50,000 ($55,500) - no small sum considering that the average monthly income in the Czech Republic is just SFr1,200 and when most wage earners make hardly more than SFr800 a month.

No longer able to cope with the mountain of debt Vaclav resorted to fraudulent activities – and breached the law.

He ended up in an overcrowded prison, like other fraudsters in a similar situation. While justice was done it did not help Vaclav learn how to manage his personal finances, deal with the judiciary or reduce his debts.

Justice reform

Putting people like Vaclav in jail does not really make sense, says Pavel Stern, director of the office for probation and mediation, a unit of the Czech justice ministry.

He says it would be less expensive for the state to re-integrate somebody like Vaclav into society instead of locking him up for a limited period of time – even if he were to remain broke and could not pay back his debt.

Under Czech law, money lenders are allowed to charge a penalty interest rate of up to 60 per cent. The legal situation is not going to change any time soon.

Stern’s ministerial unit is therefore focusing on a reform of the justice system. He can count on the support of non-governmental organisations from Switzerland.

Although not a member of the European Union, the Swiss government is funding several projects in the Czech Republic as part of its financial contribution to eastern European countries who recently joined the EU.

Involved in a programme to help the re-integration are experts from the Zurich-based Association of Probation Service in Eastern Europe. Among them are specialists with excellent professional know-how and who are familiar with the situation in the Czech Republic.

Legal advantages

“The Swiss authorities have nearly 40 years of experience with people who need help trying to reduce their debt,” says the association’s Peter Gründler.

To achieve its aim the project seeks to raise awareness of the need for legal reform to combat abuses of the commercial credit system.

Opposition against the programme comes not only from professional credit institutions, but also from smaller money lenders who target customers in a bid to get their hands on welfare money.

An additional problem is the reluctance of the state to agree to deals over court fees or alternative forms of jail sentences.

“Private lenders, such as banks, therefore are not interested in out-of-court settlements,” says Gründler.

Money lenders often also neglect to check the degree of creditworthiness of clients and rely exclusively on legal measures which put the lender in a strong position against the borrower, he adds.

Awareness

Last spring the groups and organisations involved in the reform project agreed to pool their resources.

They proposed launching campaigns in schools to raise awareness of potential financial traps and the risks of amassing debts.

The experts also called for reform of the rules on consumer credits and the pawning procedure. The aim is to ban insolvent people from applying for credit.

Material for the training courses was provided by Switzerland and Swiss experts play a key role in solving problems with private debts, according to the Czech justice ministry.

“It takes a long time,” says Gründler. “But this is hardly surprising. Even in Switzerland it often takes years before laws and regulations finally get changed.”

Aid to eastern Europe

Switzerland has been granting financial aid to countries in eastern Europe to help them transform into market economies.

As part of the second set of bilateral treaties with Brussels, non-EU member Switzerland pledged to provide SFr1 billion ($1.11 million) to ten new EU member states mainly in eastern Europe.

Switzerland pledged SFr110 million towards projects in the Czech Republic for the 2007-2012 period.

Implementation of the projects is accompanied by Swiss officials in Prague in coordination with the Czech justice ministry.

Parliament gave the green light in March 2006, but the rightwing Swiss People’s Party forced a referendum.

Voters endorsed the SFr1 billion package in a nationwide ballot in November 2006. A further SFr257 million was granted in 2009.

Switzerland paid about SFr3.45 billion towards the transition of eastern and central European states between 1990 and 2006.

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Cohesion Fund

The EU cohesion fund is aimed at member states whose Gross National Income (GNI) per inhabitant is less than 90% of the union’s average.

Switzerland’s contribution is implemented autonomously and is not part of the EU’s cohesion policy.

The cohesion fund finances activities under the following categories: trans-European transport networks and environment, including energy efficiency and renewable energy.

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Czech prisons

Last year the rate of prison inmates was 204 per 100,000 residents compared with 74 out of 100,000 in Switzerland.

More than three out of five convicts are repeat offenders in the Czech Republic.

The authorities say probation and rehabilitation programmes are key to curb numbers of repeat offenders and prison inmates.

Switzerland is funding rehabilitation programmes for prison inmates in a bid to cut numbers of repeat offenders.

Such programmes are also offered to inmates in Swiss jails, particularly for people convicted of domestic violence or those guilty of road speeding.

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