Poland argues euro best defense against crisis

Strong public finances and quick adoption of the euro are the best remedy for Poland's deepening economic turmoil, the country's finance minister said Thursday, as new figures showed a sharp drop in industrial production.

"Secure public finances and a quick adoption of the euro are the best way out of the crisis for Poland," Jacek Rostowski told parliament.

Euro membership is still years away, but the subject gained new urgency after Eastern European currencies and stock markets were hit in recent days by continuing bad economic news.

Poland and its zloty have been suffering after initially avoiding the worst of the initial fallout triggered by the collapse of banks and financial institutions in the United States and western Europe.

The zloty stood at 4.73 to the euro on Thursday — better than Wednesday's level of 4.89. That good news, however, was tempered by the Central Statistical Office's announcement that Poland's industrial production dropped 14.9 percent in January compared with the same month last year.
It was the third consecutive month of declining industrial production — a key indicator for the overall health of the economy.

Prime Minister Donald Tusk said earlier this month that Poland would stick to its plans to adopt the euro in 2012, but acknowledged that the financial crisis could threaten that goal.

The government has refused to increase the budget deficit even after the crisis pushed down 2009 growth estimates from around 3.7 percent to 1.7 percent. Instead, it opted earlier this month to find 19.7 billion zlotys ($5.5 billion) in savings in the 2009 budget.

"We are ready to find more savings, and if that doesn't suffice we don't want to raise taxes or increase the budget deficit, but we have to be prepared for a situation in which we have to choose the lesser evil," Rostowski said.

Danske Bank chief analyst Lars Christensen said Poland's public finances "are relatively strong, both in a central European and even a European perspective," and that the government is "more or less on track and moving in the right direction."

Before adopting the euro, prospective members are required to spend at least two years in an exchange rate mechanism, or ERM-II, that demands low and controlled inflation, healthy public finances and a budget deficit below 3 percent. Meeting Poland's 2012 euro target would require Warsaw to start that process this year.

Analyst Christensen said the government is veering onto a "dangerous path" with its continued talk "about ERM-2 and euro adoption when it is clear that there is no commitment on the other side of the table from the ECB (European Central Bank) or the EU Commission."

Christensen said such talk raises too many questions — such as where to peg the zloty — and "creates uncertainty rather than certainty."

Rostowski, who has been criticized by the opposition for his handling of the economy in the face of the turmoil, said adopting the euro would shield Poland's currency from pressures that have seen the zloty drop as much as 15 percent in 2009 to 4.9 against the euro and pushed up foreign debt payments.

"Our ambition to quickly join the euro stems from the fact that it is the best means to fight the crisis in Poland," Rostowski said.

The 16 countries using the euro — including Poland's neighbor Slovakia, which joined Jan. 1 — have seen growth plummet and strain on their public finances, but have not had to deal with added pain of sharp currency devaluations. Some non-euro countries, such as Iceland, Hungary, and Ukraine, have needed IMF bailouts after their currencies plunged.
Source: iht.com

Polish Zloty, Stocks Lead East Europe Rally on Government Help

Feb. 19 (Bloomberg) -- Poland’s zloty, stocks and bonds led a rally in east European markets after the government pledged to support the currency and reaffirmed its commitment to adopt the euro in 2012.

Warsaw’s benchmark stock index soared the most in almost three months, the zloty jumped as much as 2.9 percent and government bond prices rose as Deputy Finance Minister Ludwik Kotecki told Gazeta Prawna the currency will strengthen in May or June as the country plans to join the euro. Prime Minister Donald Tusk said today the currency must be protected “at any cost.”

The Czech koruna and Hungarian forint also advanced as Goldman Sachs Group Inc. said it ended bets on a further depreciation and a Czech newspaper report signaled the central bank may enter the market.

“The zloty is setting an upbeat tone for the region’s currencies on the intervention and euro-adoption plans,” said Marcin Grotek, an analyst at Raiffeisen Bank in Warsaw. “We’ve also heard verbal intervention in the Czech Republic, and the Hungarian government is talking about unconventional ways to defend the forint. All that is helping eastern European markets gain.”

The zloty strengthened to 4.6799 per euro at 4:33 p.m. in Warsaw. Poland will continue to sell euro funds from the European Union on the interbank market, PAP newswire reported, citing Finance Minister Jacek Rostowski. Adopting the euro is the “best remedy” for the economy amid the global financial crisis, he told parliament.

Best Performer

The Polish currency was the best-performer among emerging- market counterparts in the past two days, advancing 5.4 percent. It rebounded from an almost five-year low on Feb. 17 after Moody’s Investors Service said banks with east European subsidiaries may face rating downgrades.

The gain in government debt pushed the yield of the five- year note 2 basis points lower to 5.89 percent. Bond yields move inversely to prices.

“Government debt prices are gaining on the zloty’s advance, though liquidity is still low,” said Maciek Slomka, head of fixed income in Warsaw at Bank Pekao SA. “The euro sales by the government, comments on euro entry plans and the Goldman report pushed the markets up.”

The Czech koruna advanced as much as 1.5 percent after Mlada Fronta Dnes newspaper cited central bank Deputy Governor Miroslav Singer as saying he would not rule out further use of monetary policy tools, including verbal intervention, to support the currency. The koruna was last 0.6 percent higher at 28.770 per euro.

‘Non-Conventional Intervention’

The Hungarian forint jumped as much as 1.4 percent and traded at 302.00 per euro, compared with a record low of 309.71 two days ago. Hungarian Prime Minister Ferenc Gyurcsany said yesterday he asked central bank President Andras Simor and Finance Minister Janos Veres to seek a “non-conventional intervention opportunity that can help in the defense of the Hungarian forint.”

The euro snapped three days of losses against the dollar on speculation German Chancellor Angela Merkel will signal Europe’s largest economy plans to help ease the financial turmoil in the region.

Goldman recommended closing a trade betting the Polish, Hungarian and Czech currencies will decline further.

Goldman View

“We have long had the view that CEE3 currencies will likely underperform on the basis of unsustainable external imbalances,” London-based analysts Thomas Stolper and Themos Fiotakis at Goldman Sachs wrote in a note sent to clients late yesterday. “But after the rapid depreciation in recent weeks and months we now see several factors that make short positions in eastern European currencies less of a one-way bet.”

Poland’s WIG20 Index rallied 68.16, or 5.1 percent, to 1,405.94, as a rebound in the zloty boosted financial shares, calming concerns about provisions linked to currency options. Hungary’s BUX Index gained 2.9 percent, the most since Jan. 6, and the Czech PX Index rose 4.5 percent, the most in three months.

“The currency rebound pushed the banks up, no doubt about it,” said Marek Juras, head of equity research at Bank Zachodni WBK SA in Warsaw. “That brought some relief about earnings.”

The financial industry’s WIGBANK Index jumped 8.5 percent, the biggest one-day gain in almost three months as Rostowski said the Polish banking system is “healthy.”

Polish Banks

Bank Pekao SA, Poland’s biggest lender and a unit of UniCredit SpA, soared 9.85, or 15 percent, to 77.7, climbing from a seven-year low. PKO Bank Polski SA, the second-largest, gained 1.18 zloty, or 6 percent, to 21. BRE Bank SA, controlled by Commerzbank AG, increased 10.5 zloty, or 11 percent, to 107.5.

Banks led declines this year in Polish equities as they raised provisions for failed bets on currency options and the economy braces for its worst slowdown since 2002. The zloty’s slump compounded problems for companies that bought options from banks last year to bet on an increase in the currency.

Poland’s financial services regulator last week almost tripled its estimate of losses from option deals to as much as 15 billion zloty ($4.1 billion). Polish banks may have to write off as much as 2.25 billion zloty because of companies’ potential losses linked to currency options, the regulator said Feb. 10.

Source: Ewa Krukowska, Pawel Kozlowski
bloomberg.com

Poland's zloty falls 0.5 pct to key 4.50 vs euro

WARSAW, Feb 3 (Reuters) - Poland's zloty fell 0.5 percent against the euro on Tuesday and hit a key level of 4.50 zlotys against the single currency, Reuters systems showed.

These are speculative moves aimed at breaking stop losses as many people bet that currency options will force companies to buy euros. The weak economic situation adds to the grim outlook,' a trader at a Warsaw bank said.
Source:By Kuba Jaworowski, forbes.com

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

FEATURE-Pain, defiance in East Europe as strong euro takes toll

From mortgage holders to travel agents, many East Europeans are feeling poorer this winter after their local currencies lost up to a quarter of their value against the euro over the past six months.

The ex-communist region's once booming economies are now taking a nasty and unexpected further knock as the bitter row between Russia and Ukraine seriously disrupts gas supplies at a time of subzero temperatures.

Yet the mood among shoppers flocking to January sales in Warsaw, Prague and elsewhere remains surprisingly resilient and upbeat. Many say they have yet to feel the impact of the currency losses -- or of the global credit crunch that triggered them -- in their own daily lives.

"Personally I don't see any difference and customers don't seem to care whether the zloty is strong or not," said Katarzyna Pietkowska, 19, a Polish student selling souvenirs in a glitzy new Warsaw shopping mall.

"As a country, we survived Hitler and Stalin, so what's a little financial crisis," she said, expressing an optimism still prevalent among consumers in Poland, largest of the ex-communist nations to have joined the European Union since 2004.

Poland's economy is expected to have grown by more than 5 percent in 2008, though it is now slowing fast.

The zloty has lost 24 percent against the euro since last July as investors have fled a region seen as too risky at a time of global economic crisis. Hungary's forint has shed 16 percent, Romania's leu 15 percent and the Czech crown 12 percent.

Despite a brief New Year bounce, the currencies are expected to stay under pressure in the coming months as foreign investment continues to dry up and exports wither in the face of recession in western Europe, the region's main trade partner.
Some cast an envious glance at tiny Slovakia, which on January 1 became the first ex-Soviet bloc country to adopt the euro and thus escape the region's wild currency gyrations.

FEAR

East Europeans who took out mortgages and other loans in euros or Swiss francs because of lower interest rates than those offered at home are among those hardest hit.

Romanian magazine designer Dan Ivanescu, 35, said monthly instalments on a euro-denominated loan he took out have leapt by 50 percent since September.

"I used to pay 1,000 lei in the summer and now because of the level of the euro I am paying about 1,500 lei. Because of this I was forced to scrap other expenses like clothing and household appliances," he told Reuters in Bucharest.

"I also had a loan to buy a plot of land to build a house on it later. But because of this crisis I got scared and decided to pay it back to the bank."

A weaker local currency also translates into higher prices of imported goods including fuel for countries of the region.

Companies as well as individuals are suffering.
"Retail companies have foreign currency loans like everybody else and their financing costs have increased," said Gyorgy Vamos, head of Hungary's National Alliance of Commerce.

"People will also buy less as access to foreign currency loans shrinks. The import costs of producers also rise, though those who also have exports find some compensation."

The travel industry is bracing for chilly times after a huge post-communist expansion in the number of Poles, Czechs and others buying exotic holidays in the sun.

"Foreign tours are going to get about 12 or so percent more expensive this year (because of the fall in the zloty)," said Jacek Dabrowski, spokesman of the Triada travel agent network.

GLOOM IN COUNTRYSIDE

The mood darkens noticeably away from the buzz and bright lights of the region's affluent capital cities.

"People in Budapest talk easily, almost all of them have a job. In the country it is harder," said Tibor Lovas, 48, a building worker in Hosszuheteny, a village in southern Hungary.

"The New Year festivities were much more subdued here than in previous years. The bars are empty. People buy ridiculous amounts of wood or coal for heating too, like 300 kg at a time."
Hungary needed an emergency IMF bailout last autumn to avert economic meltdown. Though Budapest shoppers also turned out in force for the sales, the tone is more cautious than in Warsaw or Prague whose economies are still relatively buoyant.

"Generally, individuals do not suffer from the crisis yet, but the bad things are yet to come, including unemployment and other negative developments caused by the financial crisis," said Budapest lawyer Joszef Heffentreger, 65.

Poles, by contrast, remain among the most optimistic in Europe about the economic situation and are continuing to spend their zlotys even as the clouds darken, surveys show.

"I buy whatever I want, just as before... Maybe things are a bit more expensive, but I don't need to count every zloty," said one Warsaw restaurant owner, 57, who declined to give his name.

"But I'm sure the crisis will affect me some day," he added.
Source: uk.reuters.com

UPDATE 1-Polish zloty fall unjustified, growth to slow-cbanker

Poland's economic fundamentals do not justify the zloty's recent depreciation, although growth in 2009 could be less than 2.8 percent, the central bank governor said on Friday.

'As far as the current situation is concerned, fundamentals show that the depreciation (of the zloty) is not justified. I'm confident about the future of our currency,' Slawomir Skrzypek told reporters.
But Skrzypek, who has been a leading dove on the central bank's rate-setting council, warned of a significant economic slowdown next year.

'There are a number of risks that (the economic growth rate in 2009) could be lower than showed in the October projection (2.8 percent),' Skrzypek said.

The government expects the European Union's largest ex-communist economy to grow by 3.7 percent next year, but analysts have slashed forecasts due to a deepening recession in the euro zone and global doom that should weigh on exports.

Source:By Marcin Goclowski, Karolina Slowikowska, Chris Borowski
forbes.com

Polish c.bank head: fx interventions may be needed

WARSAW, Dec 17 (Reuters) - Poland's central bank governor Slawomir Skrzypek said on Wednesday there may be a need or currency market interventions because of the zloty's sharp depreciation.

He added he was not a fan of such a solution but that he was worried about the weakening zloty 'The zloty is subject to very big volatility. Its depreciation has accelerated over the last months,' Skrzypek told reporters.

'When it comes to possible central bank actions, the free-floating exchange-rate is a value in itself. I am not a supporter of forex interventions but such a need cannot be ruled out now.'

Source:By Adrian Krajewski, Karolina Slowikowska
forbes.com