Debt-Trapped Czechs Excluded as Economy Grows

December 17, 2018 Updated: December 17, 2018

USTI NAD LABEM, Czech Republic—Olga Petikova first borrowed a few hundred dollars in the 1990s to furnish her young family’s apartment. Later, she turned to payday loans to make ends meet as her husband struggled to make his new business a success. The debt soared.

Two decades on, she owes 2 million crowns ($86,938), which is 11 times her annual income, and she’s subject to 15 seizure orders on her property and much of the money that reaches her bank account.

Her case isn’t uncommon in the Czech Republic, now the richest of the European Union’s ex-communist countries.

People in the same situation often work in the black market to avoid having to declare income that will be forfeited to repay debts, aggravating a labor shortage cited by nearly two-thirds of companies as an obstacle to growth.

Similar “debt traps”—the result of poor financial awareness, years of loose regulation of lenders, costly repossessions and tough laws on bankruptcy—also help fuel support for extremist politicians in poorer areas.

Even small debts like unpaid fines or utility bills can grow into sums many can never repay. “I just tell my children to never do like I did,” Petikova told Reuters.

She now has a stable job but most of her salary goes to debt repayments. She gets by with help from her now-adult children.

At the end of 2017, 863,000 Czechs—nearly 10 percent of the adult population—faced at least one seizure order, meaning their income above a legal minimum can be redirected to cover debts and fees. Half of them faced four or more orders.

A total of 4.67 million seizure orders are outstanding, including for companies, for debts with a face value of 239 billion crowns ($10.8 billion)—nearly 5 percent of GDP.

A Burden on the Country

In neighboring Germany, whose population is eight times larger, there were 2.48 million seizure orders, official data shows.

Seizures in Slovakia, with only half the Czech population, were even higher, at 3.76 million in late 2017, but personal bankruptcies had cut that to 2.89 million a year later.

A recent survey showed some 60 percent of Czech companies see lack of skilled workers as an obstacle to growth, compared to a European average of 42 percent.

While prospective hires are unwilling to work for no gain, the paperwork required to employ a person saddled with a seizure order is also a burden on companies, said Eva Velickova, a spokeswoman for the Czech Confederation of Industry.

“The indebtedness of people is a problem for both society and the economy,” Velickova said.

The tough Czech approach to debtors is rooted in the country’s transformation from communism.

Laws to encourage private enterprise adopted in the early 2000s made it easier for creditors to get their money back by paying a repossession agent to collect the debt. Agents’ fees were once so lucrative that some offered to pay more than 100 percent of nominal value for hard-to-recover small debts, according to Daniel Hule of People in Need, a human-rights group that focuses domestically on social exclusion.

“We let the law be bent against society, in favor of various interest groups. That is the main problem,” Hule said. “Rather than [the Czech] population being delinquent, it is a relic of a bad system.”

Fees are lower now, but a standard seizure procedure can quickly transform a debt of around 1,000 crowns—the fine for riding public transport without a ticket—into about 10,500 crowns, according to a calculator on People In Need’s website.

In Germany, the equivalent figure would be about 3,900 crowns.

Out of the Labor Market

Seizure of income can leave debtors with as little as 6,225 crowns ($273.23) per month, a quarter of the average net wage for a single person. Half of the seizures are for debts of 10,000 crowns or less.

This can be boosted by welfare payments but those are lost as income rises—taking away any incentive to earn more. A 2016 study for the human-rights minister said tens of thousands of people were working only illegally due to account seizures.

“Debtors lose motivation not just to work harder, but to work at all, they often drift to the grey economy,” said Ladislav Mincic, chief analyst at the Czech Chamber of Commerce. “In the border regions, many of them flee out of the country in order to avoid seizure orders.”

With unemployment at a two-decade low of 2.8 percent, there were just 193,000 available workers for 324,000 job vacancies in November.

The harsh treatment of debtors has often fueled support in poor areas for far-right and far-left political parties. The Usti nad Labem region, near the German border, where 18 percent of the population have seizure orders, is the Communist Party’s electoral stronghold.

“Extreme parties get [votes] from those around who see the higher crime rate, money leaving the region, and a poorer offer of services. This is all connected to the seizure orders,” said Daniel Prokop, a sociologist at the Median polling agency.

By Robert Muller.