Thursday, February 19, 2009

Eastern Europe: Zloty, Koruna, Ruble Hunky Dory, Switzerland threatened with bankruptcy

As Grandmother used to say, "It's one tham ding or another".
From FT Alphaville:

EE meltdown averted, for now

The zloty is up vs most of its significant crosses (CHF, EUR, USD) for the second day in a row — largely down to Wednesday’s widely called-for intervention in the forex markets by the Polish finance ministry....
...But, it’s clearly enough of a change in sentiment to have convinced Goldman Sachs to close its short positions in Polish zloty and the Czech koruna. From Bloomberg:

“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 client note. “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.”...MORE

From Credit Writedowns:

In an interview with Swiss daily Tagesanzeiger, a well-known economist has warned that Switzerland risks bankruptcy, if the recent market turmoil centering on Eastern Europe is not contained quickly. At issue are loans made in Swiss francs to Eastern European debtors. With many countries in the region falling into depression, currencies and asset prices are plunging. Therefore, debtors domiciled in Eastern Europe are increasingly expected to have difficulty with mounting foreign debt loads — and that spells trouble for Switzerland.

Below is my translation of the Tagesanzeiger article.

Switzerland threatened with bankruptcy

Swiss banks have given billions of credit to Eastern Europe - now the customers cannot pay back the money. Switzerland is threatened with the fate of Iceland, says economist Arthur P. Schmidt.

In countries such as Poland, Hungary and Croatia, the Swiss franc has become an important currency. Thousands of households and small firms took out loans in Swiss francs, and not in the national currency zloty, forint, or kuna because of lower interest rates. In Hungary, 31 percent of all loans are in Swiss currency. Amongst household loans, they are almost 60 percent.

Borrowers in distress

Now, the financial crisis has ended the era of cheap credit. As a result, Eastern European currencies are falling. At the end of September, one had to pay 46 francs for 100 Polish zlotys. Today it is 30 francs. That means more and more borrowers are having problems with interest payments and repayment. So the question is what effect this has on the Swiss financial marketplace. One who sees a dark future for Switzerland is economic expert Artur P. Schmidt. He believes that the Swiss franc is in danger because of the loans in Eastern Europe.

In Poland, Hungary and Croatia, the Swiss franc has become an important foreign currency - the dollar, so to speak, of Eastern Europe. Thousands of households and businesses have franc loans. Why?

The rapid growth in many countries of Eastern Europe was stimulated through loans in Swiss francs. Swiss banks and offshore institutions loaned the local banks francs, which passed the francs onto their customers. The loans were attractive because borrowers pay interest rates much lower than required for loans in local currency.

Now, this system has been shaken?

Yes, the system has only worked as long as the exchange rate between the franc and the currencies were reasonably stable. But that is not currently the case. For example, the Hungarian forint and Polish zloty have lost over a third of their value against the Swiss franc in recent weeks. Because of the devaluations of the national currencies, the debt to Switzerland has increased by more than one-third. Many of the Eastern European countries have serious payment difficulties, and are virtually bankrupt.

What does this mean for Switzerland?

It is likely that a significant proportion of the total 200 billion U.S. dollars of Eastern European loans were issued in Swiss francs. According to a report by the Bank for International Settlements worldwide franc loans equivalent to around 675 billion U.S. dollars are in circulation...MORE
HT: Decline and Fall of Western Civilization
And back to FT Alphaville:

The speculative attack that came in from the cold

A national psyche is a national psyche. And in Poland, it has not gone unobserved that the nation’s current travails could be linked to something a little more sinister, let’s say, than simply a deteriorating economy.

Indeed, cold war-esque suspicions do appear to be bubbling away in the press.

Here’s a translation of a story appearing today in Polish business daily Puls Bizensu:

Weakening Poland is in whose interest?

“Obviously, at least Russia or the Chinese”, says Krzysztof Liedl, the head of Terroism consultancy firm Centrum BadaƄ nad Terroryzmem. “I know that that sort of suspicion exists and that Poland’s Internal Security Agency has been looking into it....

But at least the Poles can laugh at themselves too. Here’s one comedic picture doing the rounds in Polish cyberspace.

polish duck airplane

The joke is that it’s the Polish president’s plane — his surname is Kaczynski which can be interpreted as a ‘duck’.