Tuesday, February 24, 2009

Ex-communist states mount defence of battered currencies

The Financial Times
By Jan Cienski in Warsaw and Thomas Escritt in Bucharest

Published: February 24 2009 02:00 | Last updated: February 24 2009 02:00

Central Europe's battered currencies rallied yesterday after four central banks issued co-ordinated statements calling recent currency weakness unjustified and raising the possibility of intervention on foreign exchange markets.

It was the first time banks from the region's four excommunist countries with floating currencies had co-ordinated policies, a testament to the seriousness with which falls in Poland's zloty, Hungary's forint, the Czech Republic's koruna and Romania's leu are being treated.

Depreciating currencies are raising fears about the stability of local banks, something that could send shockwaves through countries such as Austria, and Italy, where many parent banks are based.

"In the assessment of the National Bank of Poland, the macroeconomic situation in Poland does not justify the scale of the weakening of the zloty. The NBP may undertake actions aimed at avoiding the unfavourable consequences of currency volatility on the economy," said Slawomir Skrzypek, Poland's central bank governor.

Mugur Isarescu, governor of the National Bank of Romania, told the Financial Times: "We had to calm down the markets, which are nervous, leading to a tendency to exaggerate, which is creating disruptive movements and imbalances."

Mr Isarescu said his institution would be prepared to use a range of instruments to support the leu, including interest rate policy, moral suasion and cutting minimum reserve requirements.

The zloty's uptick in the past few days is also a result of the government's campaign to see Poland admitted into the European exchange rate mechanism by May or June, a necessary precondition for joining the euro. The government is still holding out for Poland to adopt the common currency by 2012, in spite of a lack of enthusiasm from the opposition and Lech Kaczynski, Poland's president. The other three central European countries are less advanced in their quest to join the euro.

By late yesterday in New York the Polish zloty rose 1.9 per cent to 4.6566 zlotys against the euro, the Hungarian forint climbed 2.2 per cent to Ft297.36 and the Czech koruna gained 1.4 per cent to Kc28.43. The leu was little changed. *Latvian president Valdis Zatlers began the search for a new prime minister yesterday amid fears the political turmoil could unravel the Baltic state's €7.5bn International Monetary Fund rescue package and force it to devalue its currency.

If Latvia's fixed exchange rate regime collapsed it would hit European markets and lead to huge losses for the Swedish banks that dominate the Baltic banking sector. Ivars Godmanis, prime minister, resigned on Friday.

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