Central Europe copes with Greek contagion

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Central Europe copes with Greek contagion

Polish authorities ready to defend zloty

Yesterday, the Central European markets faced negative spill-over effects from the Eurozone periphery and global equity markets as expected. Nevertheless, although regional equity markets were under significant pressure, other asset classes did better. The zloty and the forint naturally lost some ground and Hungarian and Polish government bond yields jumped modestly but the losses have so far been rather limited. Moreover, the Czech koruna looks almost immune while the Czech bond yields and especially swap rates even slightly declined.

The fact that Central European FX and fixed income markets have been able to resists the contagion from Greece stems from the fact that - contrary to Romania or Bulgaria - there are very weak direct trade and financial links between the regional economies and the Greek economy. The only indirect threat, especial for the Polish economy, could be eventual strengthening of the Swiss franc as a significant number of Polish households have mortgages denominated in the Swiss currency. So the worst market outcome for the Polish economy would be a weak zloty on the one hand and the strong Swiss francs on the other. In this respect, it is quite important that the Swiss National Bank intervened against its firming currency yesterday, while Polish PM indicated that the NBP and the MinFin are ready to act in favour of the zloty if needed.

Thus, we believe that unless there is a violent Grexit, which would undermine the performance of the German economy, there is no fundamental basis for outright sell-off of currencies and government bonds in the Central Europe.