Polish companies face hedging losses

A year ago, the smart money in Poland and other central European emerging markets was that local currencies would continue to strengthen against the euro and the dollar, so many companies took the precaution of hedging their foreign currency exposure.
Trouble came when the global economic slowdown hit the region late last year, causing currencies like the Hungarian forint and the Polish zloty to drop sharply as investors fled to the safety of the dollar. To make matters worse, some companies had taken particularly aggressive hedges, hoping to use what was seen as a sure bet to make extra profits.

Now the estimated loss faced by Polish companies could be as high as 5.5bn zlotys ($1.7bn, €1.3bn, 1.2bn), according to the Financial Supervision Authority, Poland’s financial markets regulator.

Waldemar Pawlak, the economy minister, said that about 200 companies had already alerted the government to problems with hedges.

“In some cases the situation could be dramatic,” he told Parkiet newspaper. “That is the case with companies where the transactions were not undertaken to lessen risk but to speculate; where the foreign currency revenues of a company are a lot lower than the amount of foreign exchange they would have to pay the bank.”

To reduce their costs, some companies, including those with low foreign currency revenues, set up hedging options with several banks that would allow them to buy euros at a preferable rate, but the transaction was then financed by bets in the opposite direction, exposing them to significant risk if the zloty ended up falling instead of rising.

“These companies wanted to in some way protect themselves against a drop in revenue due to the strengthening zloty,” said Zbigniew Szczerbetka, managing partner for Poland at Deloitte, the consultancy. “They began to look for ways of improving the achievable rate, and the only way to do that was to increase the level of risk.”

Some companies have already gotten into difficulty over ill-conceived hedging operations. This month Odlewnie Polskie, a foundry equipment maker, declared bankruptcy because of the “violent and unpredictable increase in the rate of the euro and the speculative nature of options agreements”, according to a management statement. Some banks are also facing losses from customers unable to pay out unfavourable hedging contracts.

Boleslaw Bujak, chief executive of Ropczyce, whose subsidiary Elwo, a filter maker, recently declared bankruptcy, told the Gazeta Wyborcza newspaper; “In retrospect I can only say we chose bad instruments. But in the summer they were widely promoted. The offer was very attractive and it seemed a good way to protect ourselves against the strengthening zloty. All the opinions we had in the summer showed that the zloty would continue to strengthen.”

But it did not. Since its peak in July, the zloty has dropped by 43 per cent against the euro and by 60 per cent against the dollar.

The worry now is that companies will be reluctant to hedge their currency risk in the future, which could be very risky. Poland’s three shipyards failed in large measure because they failed to secure themselves against the strong zloty in recent years, and some analysts are predicting that the Polish currency will strengthen again later this year, when Poland becomes one of the few European economies not in recession.

“Over time, the real economy out-performance will matter,” said Juliet Sampson, chief economist for emerging Europe at HSBC. “No one thinks the zloty is currently overvalued.

By Jan Cienski,ft.onet.pl