Euro Snub Spurs Zloty Bets as Czech Bonds Beat Europe

BGK Euro Sales Said to Buoy Polish Zloty as 2010 Ends
Analysts at banks including BNP Paribas SA and ING Bank Slaski SA said this month Poland might try to shore up the zloty before the end of the year, to keep foreign borrowing from pushing total debt in zloty terms to levels that would trigger automatic austerity measures. Photographer: John Guillemin/Bloomberg

Just a year ago, Poland and the Czech Republic were getting ready to join the euro and share their currencies with nations from Italy to Germany and Ireland to Greece.

Now, Czech central bank board member Robert Holman says setting a date for euro adoption “would be very risky and unwise.” Polish central bank Governor Marek Belka wants the euro zone to “normalize” before his country joins.

The worst crisis to hit the euro since its creation a decade ago is causing the European Union’s two largest eastern economies to pull back from committing to give up their currencies any time soon. That’s encouraging investors who see Poland as a better bet without its currency being tied to nations receiving emergency bailouts while austerity measures and lower inflation could push Czech borrowing costs below Germany’s, according to BNP Paribas SA.

“The east European countries clearly see the benefits of having a flexible currency right now,” said Thomas Kirchmair, who helps manage 12 billion euros ($16 billion) in European bonds at Deka Investment GmbH in Frankfurt. “In the end they will join the euro but this is going to be a longer process.”

The zloty will climb 5 percent versus the euro in six months, the biggest gain in emerging markets, and the koruna will strengthen 4 percent, according to 39 forecasts tracked by Bloomberg. Yields on Czech bonds, Europe’s best performers since June, will drop to 60 basis points over 10-year German bunds next year from 96, BNP Paribas and Raiffeisenbank AS predict.

Lower Debt

Czech 10-year bonds will likely yield 15 basis points, or 0.15 percentage point, less than German bunds at the end of 2012 and 70 basis points less 12 months later, according to Bartosz Pawlowski, the London-based chief strategist for eastern Europe, Middle East and Africa at BNP, France’s biggest bank. The yield spread on Polish 10-year bonds will probably drop to 275 in a year from 307, he said in a report earlier this month.

Both countries will have lower indebtedness than the eurozone average of 87 percent of gross domestic product, with Poland at 57 percent and Czech borrowing at 43 percent, European Commission forecasts show. The Czech economy is forecast to grow 2.2 percent next year and Poland’s may expand 3.7 percent, compared with 1.5 percent in the euro region, according to the International Monetary Fund in Washington.

Closer ties to the euro zone, which helped fuel gains of more than 25 percent in the koruna and zloty from 2004 through 2008, have turned into the biggest drag on the currencies as EU policy makers struggle to restore confidence in the monetary union’s most indebted countries. The zloty weakened 3.5 percent against the dollar in the past year and the koruna fell 4.5 percent, the largest decline in emerging markets after the currencies of Romania, Bulgaria and Hungary.

Irish Rescue

The EU and IMF provided 85 billion euros to bail out Ireland and 110 billion euros for Greece this year. The Irish rescue sent yields on Spanish bonds to the highest relative to German bunds since the euro’s inception at the end of last month. Portugal may face credit rating downgrades as budget cuts risk stalling the “sluggish” economic recovery, Anthony Thomas, London-based lead analyst for Moody’s Investors Service in Portugal, said in a statement yesterday.

The debt crisis has raised questions about “whether the euro zone is standing on sound foundations,” Ceska Narodni Banka board member Holman said in an interview in Prague on Dec. 9. Polish central bank Governor Belka told reporters in Warsaw the same day that while euro adoption is still “a strategic goal,” the EU needs to find a solution for its debt crisis first.

No Target Date

Poland and the Czech Republic agreed to give up their national currencies as part of their entry into the EU in May 2004. Hungary won’t fix a target date to join the euro before 2012, Economy Minister Gyorgy Matolcsy said at a news conference in Budapest on Sept. 8.

“A couple of years ago this would have been negative” for the koruna and zloty, said Ulrich Leuchtmann, the head of currency strategy at Frankfurt-based Commerzbank AG, Germany’s second-biggest bank. Now, stalling on the euro is “net positive” because the financial health of Poland and the Czech Republic is better than most euro members, he said.

While Romania has an official target of adopting the euro in 2015, President Traian Basescu said on Sept. 22 the currency switch may need to be delayed by as long as two years. Bulgaria scrapped a plan in April to enter the exchange rate mechanism this year after revising the 2009 budget deficit beyond the EU’s limit.

Baltic Expansion

European monetary union is still expanding with Estonia set to become the 17th member of the euro area on Jan. 1 and the third post-communist country to adopt the single currency after Slovenia in 2007 and Slovakia in 2009. Lithuania and Latvia have their currencies pegged to the euro and both nations aim to enter the monetary union in 2014.

Eastern European currencies will weaken as speculators currently targeting Irish and Greek debt turn their focus to countries with the strongest links to the euro zone, said Savvas Savouri, the chief economist at Toscafund Asset Management in London. Hungary’s forint may lose more than 50 percent of its value to lead declines, Savouri said.

“It will be a domino effect and the last domino to fall will be the largest,” he said. “It will be Poland.”

Currency strategists at some of the world’s largest banks including Barclays Plc and Credit Suisse AG are more optimistic. The koruna will rally to 24.4 per euro by the end of June from 25.234 on Dec. 17, according to the median of 19 forecasts compiled by Bloomberg. The zloty will appreciate to 3.91 per euro from 3.9927, the median of 20 projections shows.

The forint is likely to weaken 0.5 percent against the euro, according to strategists’ forecasts.


Czech and Polish government bonds are already outperforming the debt of euro zone countries. Yields on Czech 10-year koruna notes have fallen 42 basis points since June to 3.84 percent, data compiled by Bloomberg show. German bund yields climbed 29 basis points to 2.93 percent during the same period. Polish 10-year bond yields rose 5 basis points to 5.98 percent, compared with increases of 160 basis points for Greece and 335 for Ireland.

Czech lawmakers approved the 2011 budget on Dec. 15 that cuts spending on public wages and social benefits to help meet Prime Minister Petr Necas’s pledge in June to cut the fiscal gap to within the EU’s limit of 3 percent of GDP by 2013 from 5.8 percent last year.

The Czech Republic is ranked A by Standard & Poor’s, the fifth-lowest investment-grade rating, and Poland is one step lower at A-. Germany has the top AAA rating from S&P.

“Fiscal consolidation and an outlook for better ratings” may boost Czech bonds, said Michal Brozka, a Prague-based analyst at Raiffeisenbank. “The question obviously remains how much the bailout of the euro area’s periphery will weigh on German bunds.”

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