`Brexit' Risks Move East as Citigroup Sees Zloty Most Vulnerable

  • EU's post-communist countries at risk to Brexit: Citigroup
  • British pull-out would threaten billions of euros in subsidies

What Possible ‘Brexit’ Means for the EU and the Euro

The world’s biggest currency trader is starting to paint what-if scenarios for central Europe’s leading currencies in the event of Britain’s exit from the European Union.

Citigroup Inc. says even though a so-called Brexit is unlikely, the EU’s post-communist economies would be among the hardest-hit because they depend on subsidies from the bloc’s wealthier members. Poland’s zloty would be most exposed to a vote by the U.K. in June to leave the union, according to the bank.

“Central European economies may be potentially the biggest losers in case of a renegotiation of EU budget’s rules and ceilings” triggered by a potential Brexit, Citigroup strategists including Piotr Kalisz in Warsaw and Luis Costa in London said in a report to clients on Wednesday. “The zloty stands out as a significantly vulnerable currency should EU structural funds gradually dry up.”

Currencies and bonds of the bloc’s east have largely resisted uncertainty about the EU’s future composition which has weakened the pound and boosted risks for the euro, because of the region’s limited trade and banking ties with the U.K. But Brexit could threaten billions of euros of funds that are now helping to build highways and other infrastructure from Poland to Romania, according to Citigroup, which joined France’s Societe Generale SA and Commerzbank AG of Germany warning of the consequences for the region.

Poland’s outgoing central bank Governor Marek Belka told journalists in Warsaw on Wednesday that a Brexit could “destabilize financial markets and that would probably influence the Polish economy.” Mugur Isarescu, the chief of the central bank in Bucharest, said on Thursday that uncertainty about U.K.’s membership is one of “high systemic risks” to Romania’s financial stability.

Risks Overlooked

Kalisz and Costa are echoing concerns voiced last month by Commerzbank that a Brexit would create risks for political and economic stability across the EU not reflected in emerging Europe’s asset prices. Societe Generale told clients in a March 17 research report that the zloty would suffer the biggest losses because of its “proxy” status as the region’s most liquid currency.

The Polish currency has gained 1.4 percent in the past three months, trading at 4.2845 against the euro as of 2:36 p.m. in Warsaw. The zloty has climbed 9.5 percent versus the pound in the same period.

Citigroup’s exchange-rate forecasts, based on expectations that the U.K. will stay in the EU, show the zloty will weaken to 4.39 per euro by the end of this year, compared with a median estimate in a Bloomberg survey for little change from current levels. Kalisz declined to comment on Brexit beyond the report.

Thanks largely to EU subsidies, Poland, Hungary, Romania and Czech Republic have outpaced the bloc’s growth in the past two years. With its $545 billion economy and 38 million people, Poland is scheduled to receive 114.7 billion euros ($131 billion) of funds between 2014 and 2020, the most of all 28 states, the EU website shows. The U.K. was the third-largest net contributor in 2014, adding 7.1 billion euros to the budget, data from the Treasury in London show.

“We see Poland and Hungary as potentially the most vulnerable in the group, given that these two countries have been the biggest beneficiaries of the EU budget,” according to the Citigroup note. “A reduction in EU funds would be a painful blow.”

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