The trickle-down debacle
Those hardest-hit are the ones unprotected by Eurozone membership — the Central and Eastern European (CEE) countries, whose banks are nonetheless dependent on the Eurozone.
“Of Poland, Hungary and the Czech Republic, Hungary is the most dependent and the Czech Republic the least with Poland in the middle,” says economist Daniel Hewitt of Barclays Capital. “The Czechs have a low loans-to-deposit ratio, so their personal financing structure is very self-dependent even though their banks are foreign-owned.”
Hungary’s situation is complicated by the fact that its high interest rates drove people to borrow money abroad — mostly Switzerland and the Eurozone, both of which have seen their currencies soar relative to the koruna.
“Hungarians began shifting to FX loans in 2004, when the government stopped subsidizing [Hungarian] forint loans,” says Hewitt. “Everyone started borrowing in FX, from individuals with mortgages to major corporates. Today, two-thirds of Hungarian bank loans are in foreign currencies.”
Roughly half of those loans are to corporations, but many of those companies are export-related — meaning they’re naturally hedged. A growing proportion of corporate debt is related to project loans, 21.5% of which are non-performing.
The Polish economy is among the fastest-growing in Europe, and the Czech economy is shrinking, but risk — not interest rates — is driving exchange rates between the two countries.
“Monetary policy in Poland and [the] Czech Republic started to diverge significantly,” says Thu Lan Nguyen, a currency analyst at Commerzbank. “While the Polish central bank hiked key rates in April to counter inflationary pressures, the Czech central bank has eased monetary policy to support the domestic economy.”
That, she says, sparked a surge into long zloty/short koruna positions — positions she says haven’t been rewarded when markets are in risk-off mode.
“When risk aversion started to rise following the first Greek elections at the beginning of May, the koruna actually was able to outperform its CEE peers,” she says. “It thus seems that the currency instead partly has regained its status as a safe haven within the region.”
Indeed, if you’re looking for an indicator, skip interest rate differentials and focus on bad loans. “Since 2010, changes in interest rate differentials have had hardly any explanatory power for the changes of the zloty/koruna exchange rate,” she says. “But changes in the difference in credit default swap spreads were able to explain exchange rate movements rather well” (see “Fiscal trumps interest,” above).