Worldwide Property Forums | Re: poland - currency collapse?

This article in the FT gives a useful perspective on the exchange rates of CEE countries. Hopefully, Poland (and Czech and Slovakia) is better placed to weather what appears to be a gathering storm but Poland is specifically implicated here too:

Crisis mounts in East Europe after shock 3pc rate rise by Hungary.
Hungary has raised interest rates by three percentage points to 11.5pc in a drastic move to stop the collapse of its currency peg against the euro, raising fears of a crunch across Eastern Europe as a string of states are forced to follow suit to stem capital flight.

By Ambrose Evans-Pritchard
Last Updated: 5:55AM BST 23 Oct 2008

Hungary has raised interest rates to stop the collapse of its currency peg against the euro: a man cleans the window of a currency exchange in Budapest. Photo: Reuters
The fast-moving crisis echoes the final days of the Exchange Rate Mechanism in 1992, when Britain, Italy, and Sweden raised rates to extreme levels to defend their currencies despite economic recession, with little success.

Hungary's premier Ferenc Gyurcsany said the county was left with no choice as the forint went into a free-fall. It has dropped 16pc against the euro since the start of the month and is now at the bottom of its ERM band. "There is still an exceptionally large speculative pressure on the forint. We will take every measure necessary," he said.

It is unclear whether the move will prove enough to prevent a forced devaluation. The treasury had to cancel a bond auction yesterday as buyers stayed away.

"We doubt the effect will be long-lasting," said Lars Christensen, East Europe strategist at Danske Bank. "The markets are very likely to test how far the central bank is willing to go."

Simon Derrick, from Bank of New York Mellon, said the rate rise was probably doomed to failure. "As soon as you see aggressive actions like this when the economy is not strong to take it, you know it is unsustainable," he said.

There is a risk is that hedge funds will pick off those East European states with big current account deficits that rely on foreign financing, smashing the pegs or 'dirty-floats' one by one. The deficits have reached 23pc of GDP in Bulgaria, 16pc in Estonia, and 16pc in Romania.

Investor flight from stocks, bonds, and currencies across the region has become a stampede. Contagion hit Turkey and South Africa yesterday, while credit default swaps on Russian debt jumped to 817 basis points, signalling extreme fear.

Hungary has already received a €5bn loan from the European Central Bank and is in talks with the International Monetary Fund. Ukraine has requested an IMF bail-out, and Belarus joined the queue yesterday with a plea for a $2bn loan.

Maya Bhandiri, from Lombard Street Research, said Hungary was primed for crisis after letting rip on foreign credit, letting net external debt reach 90pc of GDP.

Some 60pc of all mortgages and car loans are funded in foreign currencies, mostly euros or Swiss francs. Hungary's government is now letting debtors switch franc loans into forints and even forgive debts in what amounts to a bail-out of the most reckless. Unicredit warned that this may cause markets to question the credit-worthiness of the state itself.

The Baltic States, Poland, Croatia, and Romania have also let foreign mortgages proliferate. Mr Christensen says the region is even more overstretched than East Asia on the cusp of the 1998 crisis. "Imbalances have grown to unsustainable levels. The unwinding is likely to be painful and disorderly. There is a clear risk of the situation getting out of hand, with serious implications for Western Europe," he said.

Veterans of the ERM crisis in 1992 say the process could spiral out of control quickly. If hedge funds taste blood knocking out the pegs in Eastern Europe, they may turn their attention to those eurozone states inside that have rely on foreign funding to plug their huge deficits - notably Spain, Portugal, and Greece.