Czech Republic
Czech koruna under short-term pressure, different story from Hungary
Hungary
IMF prepares a package for Hungary
Poland
GDP growth prospects fade, aggravating fears the region will be hard hit by global crisis.
Slovakia
The NBS decision in focus
Overview
The going gets tough in Central Europe
The going gets tough in numerous markets in the region. There is hardly any, certainly not good, explanation for the 5% inter-day volatility of the Czech koruna, the frozen bond market or the fluctuations in money market rates at levels completely beyond expectations of future interest rate developments.
Nevertheless, there are several reasons behind the current developments. The region has become infected by the panic surrounding the global financial crisis, through the Hungarian forint, which pays a dear price for the country’s high foreign debt and bad external balance. Given the current tense conditions, the financing problems have convinced the Hungarian central bank to raise rates by 300 bps, to stop the forint from crashing. The woes of the Hungarian forint worsened the mood throughout the region, and significantly weakened the Polish zloty and the Czech koruna, although, paradoxically, the Czech Republic has one of the lowest foreign debts in Europe and its problems are far smaller than those of Hungary. In addition, the weak koruna quickly pushed Czech yields upwards, despite the general expectations of a rate cut.
The shallowness of numerous markets make that big orders in forex markets can influence the exchange rate much more than under normal conditions. This explains why the Czech koruna was able to quickly offset its losses that were driven by the forint, and strengthen by more than 5% in a few days.
Another factor that might explain the current turmoil is the (irrational?) fear that the local banks lose the funding support of their European mother banks that are often too affected by the global credit crisis.
The wild rodeo-like trading is unlikely to disappear in the next few weeks. Nevertheless, we insist that the situation of the Polish and Czech economies differs greatly from that of other, highly indebted economies of Central and Eastern Europe (Hungary, the Baltic States, and Romania). Hence ‘the wheat should be separated from the chaff’ after some time, with the zloty and the koruna likely to be the first currencies to stabilise. This week, notwithstanding the global turbulence, Poland will announce its road map to the euro by 2012, and this may be the start of markets to discriminate between countries in the region.
