Central Europe’s Scant Swiss Miss
Shares in Hungary and Poland, and to a lesser extent in the Czech Republic and Slovakia won a brief respite from year-to-date losses with the Swiss central bank’s determination to cap the franc’s regional currency appreciation at a headline 1.2 to the euro, as the countries’ corporate and mortgage borrowers pled for succor from already 50 percent higher debt loads. The Budapest and Warsaw exchanges were down over 10 percent as governments with fiscal deficit vises nonetheless offered relief programs. The Orban administration rushed to finalize an outline proposal to fix the forint exchange rate at 20 percent below the current level which will allow eligible applicants to repay their outstanding balance immediately, while the majority can refinance in installments over time. Trading was suspended in the benchmark bank listings OTP and FHB during the announcement, and the former embarked on a buyback scheme to support its price after a 15 percent drop. Austrian-owned units slammed the action as “destabilizing with serious macroeconomic consequences” as diplomats threatened to take their case to EU tribunals for alleged repudiation of legal contracts. Hungarian officials, who previously dismissed objections to the special profits tax, responded that the mechanism would “split losses” on the 15 percent of GDP Swiss franc debt as they rejiggered budget and growth targets straining under the larger Eurozone crisis. The 3 percent output forecast has been nearly halved, although inflation is also subdued and the private pension takeover provides quick treasury injections. Non-residents, with a one-third ownership position, have continued to buy domestic paper, but yields have crept up toward 6 percent in recent auctions and their preference has skewed toward shorter-term maturities as during the pre-IMF rescue late 2008 period. Credit default swap spreads above 450 basis points are at a 2-year high, as ratings agencies are reportedly preparing further sovereign downgrades.
In Poland, where franc-denominated housing loans are half the total, central bank head Belka described foreign exchange exposure as poison, while providing assurances over system safety and expanding Swiss currency access through banks and money exchanges under a new law allowing repayment in that unit. The zloty dropped to fresh lows against the euro and dollar despite another 4.5 percent GDP growth figure in Q2 on domestic demand with inflation around the same level. The budget deficit will exceed 5 percent of output and the current account gap is at that proportion after statistical revisions, but voters appear content with the Tusk government’s economic handling with re-election imminent. The bourse postponed a privatization sale in number two Bank PKO but continues to seek sub-regional listings from Ukraine and elsewhere as antidotes.
