Republic
Bond yields sharply higher as FinMin plans to issue an expensive eurobond
Hungary
EUR/HUF seriously tests the 300 level
Poland
Economy on track to zero growth...
The Week Ahead
Another 50 bps rate cut from the CNB?
Overview
Forint sell-off shakes the whole Central European area
Foreign media are increasingly associating Central and Eastern Europe with the term ‘crisis’. Indeed, investors are becoming more and more nervous about the FX exposure of Central European borrowers (notably households). Speculative sales, which are also driven by the threat of the relating problems in the banking sector, most severely affect the Hungarian forint. The currency has weakened by more than 30% since the middle of 2008, and is close to 300 EUR/HUF – the weakest level ever.
The banking sector in Central and Eastern Europe had not experienced any substantial problems until recently. The exposure to ‘toxic’ assets, which is responsible for today’s global crisis, is very small, because banks focused on the conventional provision of commercial loans – particularly mortgages to households. The high domestic interest rates in a number of countries (notably Hungary, Romania, and partly also Poland) encouraged banks to grant loans denominated in foreign low-interest currencies to households (the Swiss franc was particularly popular).
With liquidity in global financial markets having dried up and local currencies having weakened rapidly, households find their originally cheap financing to be much costlier now, with the risk of failure to repay the loans rising. The situation is most serious in countries with the largest number of foreign-currency loans granted to residents – more than 50% of all granted loans in Hungary and Romania, as opposed to less than 10% in the Czech Republic, and less than 30% in Poland. This is also why the depreciation of a local currency is not such a serious problem for the Czech and Polish economies, unlike the Hungarian one. Moreover, the depreciation may even encourage exporters’ competitive ability during hard times, and maintain positive inflation expectations.
