It’s getting bleaker by the minute in Eastern Europe. In case you didn’t catch the latest from the Telegraph’s Ambrose Evans-Pritchard, he warned at the weekend how a growing crisis in Eastern Europe could cause nothing less than a total collapse in the West, or as he put it: “If one spark jumps across the euro zone line, we will have global systemic crisis within days.”
To make his point Evans-Pritchard quotes Morgan Stanley’s Stephen Jen on the fact that Eastern Europe has borrowed a total of $1,7oobn abroad. Furthermore about $400bn of that debt has to be rolled over this year – a number equivalent to about a third of the region’s GDP.
As we outlined a couple of weeks ago, the concern is now greatest not for the retail mortgage sector, which practiced the issuance of foreign-currency based mortgages on a grand scale, but for corporates — which it appears practiced the art of derivative forex exposure on an even grander scale.
And so it comes as no surprise on Monday that yet another corporate forex failure has occurred in Poland, this time at Polski koncern Miesny Duda, a Polish meatpacking business. The stock sank to a record low on the news. As Bloomberg reports:
Feb. 16 (Bloomberg) — Polski Koncern Miesny Duda SA posted the steepest drop since it started trading in Warsaw in 2003, after the Polish meatpacker reported losses on derivatives. Duda slumped 0.4 zloty, or 33 percent, to 0.8 zloty, closing at a record low. The WIG Index retreated 3.3 percent. The company’s unrealized losses on open currency derivatives contracts reached 29.3 million zloty ($7.8 million) at the end of last year, it said in a regulatory statement today. Duda’s net income was 22.4 million zloty in the first nine months of 2008, according to a regulatory filing on Nov. 5. Polish companies lost on contracts designed to protect them from the strengthening of the zloty, which climbed to a record against the euro in July. The currency has tumbled 33 percent since then as investors shunned emerging-market assets in the global financial crisis.
All of this comes in the context of a clearly intensifying panic in the country. First of all there was a string of bad-news stories from the financials last week. On Monday, the zloty set fresh record lows on most major crosses leading to the Warsaw WIG20’s lowest close since November 2003, down 3.6 per cent in late afternoon trade. The country’s two largest banks PKO BP and Pekao (owned by Unicredit) fell as much as 8.2 per cent.
Polish business daily Puls Biznesu described the zloty rout as nothing more than a panic –in the absence of any other major fundamental news the paper blamed unfavourable reports in the western press, among them The Telegraph, for the intensifying deterioration.
Bloomberg, meanwhile, reported that Bank of America Securities-Merrill Lynch expects the zloty to weaken even further against the dollar in the next two months, down by at least another 13 per cent to 3.85 per dollar.
All of which should incite some sort of reassurance or action from the authorities/government or central bank right?
No such luck. In fact, the Polish central bank warned on Monday against joining the pre-euro ERM 2 mechanism, which had been viewed by many investors as the only potential saving grace for the Polish economy.
Polish authorities’ apparent reluctance to intervene is really beginning to worry analysts who believe the best solution is some sort of coordinated forex intervention, ideally with other Eastern European states.
Forex failure begins in Poland – FT Alphaville
Fitch worried about Polish corporate FX exposure – FT Alphaville
Domino theory, Eastern European edition – FT Alphaville