Zloty Drop to 27-Month Low Defies Fundamentals, Poland Says

The zloty tumbled to the lowest level in 27 months on concern the global recovery is faltering, prompting Polish central bank Governor Marek Belka to warn the currency is getting out of synch with the country’s “healthy fundamentals.”

The zloty slid 2.2 percent to 4.45256 per euro as of 5:54 p.m. in Warsaw, the weakest since June 2009. The yield on bonds maturing in April 2016 rose 12 basis points to 5.28 percent, the highest since Aug. 9. The cost to insure Polish debt for five year in credit-default swaps market jumped 40 basis points to 310 basis points, the highest since March 2009, according to CMA and data compiled by Bloomberg.

The zloty fell for a fourth day after the Federal Reserve said yesterday the U.S. economy faces “significant downside risks,” sparking a selloff in emerging-market assets. Belka said zloty’s slump is “now largely determined by external circumstances, which are exerting a negative influence on the Polish economy,” according to the central bank’s Obserwatorfinansowy.pl website.

Belka’s comments indicate “that if depreciation gathers momentum the central bank will intervene,” said Thu Lan Nguyen, foreign-exchange strategist at Commerzbank AG in Frankfurt. “It will be difficult because it’s always hard to intervene against the weakening currency that’s driven by external factors.”

The Fed said yesterday it will replace $400 billion of short-term debt with longer-term Treasuries to spur growth as the recovery falters two years after the biggest slump since the Great Depression, spurring the steepest drop in the MSCI Emerging Markets Index since 2008 today. The biggest risk to the euro area is a run on southern European banks, said Kenneth Rogoff, a former chief economist at the International Monetary Fund, Handelsblatt reported.

Containing Spread

The lack of a mechanism to contain the spread of Europe’s debt crisis is “very negative” for central eastern European markets, said Manik Narain, an emerging-market strategist at UBS AG in London. “We may be moving closer to a stage when authorities start being worried about the zloty depreciation.”

Poland sends 55 percent of its exports to the euro area and most of the country’s banking assets are controlled by foreign lenders, according to the statistics office and the country’s financial regulator. The European Union’s largest eastern economy has “non-negligible external financing needs,” which makes the zloty “exposed to contagion risks from the euro area,” Barclays Capital strategists including Koon Chow in London wrote in a quarterly report yesterday.

Public Debt

Poland sends 55 percent of its exports to the euro area and most of the country’s banking assets are controlled by foreign lenders, according to the statistics office and the country’s financial regulator. The European Union’s largest eastern economy has “non-negligible external financing needs,” which makes the zloty “exposed to contagion risks from the euro area,” Barclays Capital strategists including Koon Chow in London wrote in a quarterly report yesterday.

Poland’s state-owned Bank Gospodarstwa Krajowego sold Europe’s common currency before the end of 2010 to shore up the zloty and keep foreign borrowing from pushing total debt in local currency terms to levels that would prompt austerity measures.

The ministry uses the so-called fixing exchange rate from the last working day of the year to determine the public debt level. If debt exceeds 55 percent of gross domestic product, spending cuts and tax increases would be required under public finance law.

Intensifying Sales

BGK will “intensify” its sales of euros on the currency market in the fourth quarter, Deputy Finance Minister Dominik Radziwill was quoted as saying by PAP newswire on Sept.7.

Poland’s ratio of public debt to gross domestic product is unlikely to exceed 55 percent this year as long as the zloty stays stronger than 4.9 per euro, Bank Zachodni WBK SA said in a report today. Citigroup Inc. estimates the level at 4.7 per euro.

“The bottom line is that although the finance ministry has some, very limited, room this year it will probably need to accelerate foreign-currency intervention efforts in the fourth quarter,” Piotr Kalisz, chief economist for Poland wrote in an e-mailed note to clients today.

To contact the reporter on this story: Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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