Poland’s forex exposure as related to foreign-currency denominated mortgages has been well documented here on FT Alphaville. But in case anyone was of the view that the market was just too small to have a severe impact on the economy, here’s another example of how zloty weakness may cause havoc in a nation of apparent forex speculators.
From Reuters (our emphasis):
WARSAW, Jan 16 (Reuters) - Polish foundry maker Odlewnie Polskie ODPL.WA said on Friday it was filing for bankruptcy, becoming the first Warsaw-listed company to face bankruptcy because of currency options. In a statement Odlewnie said the filing was due to: “banking valuations resulting from the currency option deals which caused the value of our liabilities… to top the value of the company’s assets”.
Last summer the Polish currency soared to a record high against the euro and many Polish companies took out hedging contracts, effectively betting on further zloty appreciation. As the currency weakened many of them found themselves with losses which some analysts said could be huge. “The state of insolvency arose due to extraordinary circumstances caused by a rapid and unpredictable strengthening of the euro versus the zloty and by the speculative character of the currency options agreements offered by banks,” the statement said. “In theory, those agreements were supposed to secure the company from changes of the zloty versus other currencies and in fact they exposed the company to a big risk,” it said.
Last month the Polish financial watchdog estimated local banks may need to take out as much as $284 million in provisions to account for client losses on currency options, which account for 155 million zlotys ($49.33 million) among Warsaw-listed companies. Analysts cautioned, however, that the figure could grow as the zloty continues to weaken. The Polish currency is down almost 8 percent since the beginning of December and has shed more than 30 percent since the end of July.
Bloomberg reports the company has now asked Polish lenders, including Bank Handlowy, Bank Millennium and ING Bank Slaski to start debt negotiations as soon as possible.
Meanwhile, the zloty continues to weaken. Today it fell to its lowest since the end of 2004 - around 4.306 per euro - largely due to ever-poorer wage data. Furthermore, it seems the government’s promise of accelerating the process of euro-adoption - which helped calm the zloty’s decline back in October - is failing to reassure markets. In fact most analysts think its 2012 entry target is as good as no target at all.
Here’s the view from RBC capital, basically saying there’s no way the date was ever going to be achievable (our emphasis):
The timetable for Euro membership by January 2012 is simply too tight. The PLN needs to enter ERM2 by mid-2009, at the latest; but this looks extremely unlikely. First, Euro membership requires support from the main opposition parties and/or the president, but this is conditional on the outcome of a proposed public referendum. Second, a referendum will not be held before June (to coincide with the European Elections). Third, even with a positive public vote the Polish constitution must then be changed to remove the stipulation that the national currency can only be issued within Poland.
On top of all this, there is no guarantee that Poland will meet the five Maastricht convergence criteria. Holding the PLN stable within the ERM2 bands for two years may prove to be a tall order while the budget deficit, which has been squeezed lower purely as a result of recent strong economic growth, will widen sharply as the economy slows, breeching (SIC) the 3%/GDP limit and disqualifying Poland from Euro entry. The best way to play the likely Euro delay is to be a payer of the 5y5y forward spread (targeting 120bp). At just 31bp at present, this is ignoring all the pitfalls along the way.
So it looks like a catch-22: the only way Polish zloty can be saved from further weakening is Eurozone membership, but Eurozone membership becomes ever more impossible the weaker the zloty gets because of the Maastricht criteria.
Related links:
Another Eastern European meltdown? - FT Alphaville
The big Le-borrow-ski - FT Alphaville
Unicredit’s Eastern Exposure - FT Alphaville
