Poland Claws Back Credibility as Zloty Jumps on Bank-Loan Relief

  • President’s mortgage-conversion plan hands banks a lifeline
  • Zloty’s implied volatility tumbles to lowest level this year

Floundering at its weakest level since 2011, facing the risk of credit downgrades and dogged by a $36 billion mortgage-relief plan, the outlook for Poland’s zloty was looking bleak.

Just six weeks later, it’s rising at the fastest pace since December after the government passed control of the proposal to convert Swiss-franc mortgages, which had loomed over lenders for a year, to the central bank. The prospect that policy makers won’t strain the foreign-currency market with a forced and immediate conversion has helped make the zloty Europe’s best performer this quarter, driving implied volatility to the lowest since January and triggering buy recommendations from Societe Generale SA and ING Groep NV.

The currency’s advance shows Poland is clawing back some of the trust lost after eight months of Law & Justice party rule threatened to derail the biggest success story in the former eastern bloc with populist policies and a firmer state hand in the economy. While political risk still looms, as the new government locks horns with the European Union over democratic values, currency investors are betting its policy will prove more favorable than initially feared. 

"Pragmatism does seem to have prevailed," said Roxana Hulea, a strategist at SocGen in London, who recommends buying the currency against the Hungarian forint. "While the government hasn’t managed to entirely overturn the initial fears that engulfed markets in the aftermath of its victory last year, there are simply less negatives in the pipeline."

Click here for an explainer on Poland’s populist turn since elections last year

The mortgage plans, announced last week by President Andrzej Duda’s office, point to a gradual, central-bank led conversion of the mostly Swiss-franc loans into zloty. Lenders will also be required to refund 4 billion zloty ($1 billion) to compensate for using excessive spreads when setting the conversion rate for the mortgages. That represents a smaller burden for banks than the initial strategy, which envisaged switching loans at sub-market exchange rates.

The currency surged to a three-month high against the euro after the proposals were unveiled, posting the biggest two-day gain in more than a year. Ten-year government bonds rallied to the strongest this year, pushing the yield as low as 2.72 percent. The zloty appreciated 0.1 percent at 4.2747 as of 4:28 p.m. in Warsaw on Monday, after rising 1.9 percent last week, the biggest 5-day gain this year.

Three-month volatility, a measure of the future risk investors see for a currency, has fallen to 7.1 percent, the lowest since January. The rate may decline further to 6 percent according to ING’s Petr Krpata and Rafal Benecki, who recommended betting on the currency’s swings converging with those of the forint.

Zloty volatility surged in January after S&P Global Ratings handed the country its first-ever credit downgrade, citing concern over the independence of key institutions following Law & Justice’s October election win. Price swings hit a four-year high five months later as the currency sank to the weakest since 2011 after the U.K.’s decision to quit the European Union sent shock waves through markets globally.

The new mortgage proposal is “zloty-positive” and reduces the risk of additional rating cuts, Krpata and Benecki wrote in a note, which proposed trading strategies that pay out if zloty volatility falls further. The plan may “remove some of the perceived negativity away from the currency, having previously been threatened by the forced, one-off loan conversion,” they said.

The mortgage plan hasn’t dispelled all concerns. Even after 3 analysts raised their zloty forecasts immediately after the announcement, the average of 47 polled by Bloomberg points to the currency weakening a further 1.9 percent to 4.36 per euro by the end of the year.

"Some political topics remain,” said Wolfgang Ernst, an analyst at Raiffeisen Bank International AG. “Even the foreign-currency loan conversion plan still entails some sources of uncertainty."

Amid the political turbulence, Poland’s central bank has boosted the currency’s credibility by providing an anchor. Keeping borrowing costs unchanged for 16 months has offered support for the zloty, and the economy in no need of a “fix” or stimulus by unorthodox means, according to Governor Adam Glapinski.

That cautious approach to easing contrasts with monetary policy in Hungary, where the central bank has completed two rate-cut cycles since the beginning of last year and plans further policy easing later in 2016.

Poland’s economic data also offer reassurance. Gross domestic product will probably expand by 3.4 percent this year, the fastest clip in the European Union’s east after Romania, according to estimates compiled by Bloomberg. Government spending will stay within the 28-nation bloc’s limit of 3 percent of economic output until 2018. Consumer prices will drop an annual 0.5 percent this year, before rising 1.5 percent in 2017, the survey shows.

Jakob Christensen, the chief analyst at Danske Bank A/S in Copenhagen, sees the currency strengthening to 4.22 per euro in the next 12 months. Support will come as political uncertainty declines, confidence that the government will meet next year’s budget target increases, and robust growth prompts speculation monetary policy can be tightened, he said.

“Economic policy-making by the new government is turning out to be more pragmatic than feared on the eve of the election."

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