After hardly any action, the Polish government has finally signalled it is prepared to intervene in the forex market to stem the zloty rout which is currently causing jitters.
At 5 zlotys per euro, Prime Minister Donald Tusk says Poland will sell euros from the country’s reserves. The government will also look for other ways to limit damage to the country’s businesses from currency-option transactions he told a news conference. This from Bloomberg (our emphasis):
The cabinet will adopt a schedule of actions to investigate whether the options were legal and help companies in their negotiations with banks, Tusk told a news conference in Warsaw. Economy Minister Waldemar Pawlak said earlier today that he may push for a parliamentary vote on his proposals to annul some of the transactions if the Cabinet doesn’t agree to them.
Polish companies lost on bets the zloty wouldn’t weaken, after the currency reversed its advance last year because of a slump in the economy. Odlewnie Polskie SA, the steel-products maker that last week won court protection from creditors, reported a record quarterly loss yesterday from such options. “We discussed the options and other derivative instruments at the cabinet meeting today and we reached two conclusions: we will audit state-owned companies to see who was responsible for those contracts and we will not take any steps that would burden taxpayers with the costs of those deals,” Tusk said.
The country’s financial-services regulator last week almost tripled its estimate of potential losses from option contracts to as much as 15 billion zloty. Pawlak, who heads the Polish Peasants’ Party, the junior partner in Tusk’s coalition government, last week proposed a rule that would allow companies to unwind transactions if banks didn’t make them aware of the risks involved. Some ministers object to his proposals, PAP newswire reported yesterday.
While the statement briefly supported the zloty in Tuesday trade versus further all-time lows against the euro, the respite did not last. And we’re not surprised. If the Polish government’s solution to the problem, as expressed by the Peasant Party’s Waldemar Pawlak, is just to annul the fx options, it’s hardly going to do much to reassure faith in Poland as a trading partner or financial counterparty. What is more, Polish companies sold these fx options, which means annulment is tantamount to default.
Polish reserves meanwhile stand loosely at some $60bn according to the IMF, which according to analysts is still sizeable enough to have some impact. The reserves are certainly larger than in some other European counterparts, as a result. direct intervention would still appear to be the best route.
We note with interest the following report from Reuters as well (our emphasis):
WARSAW, Feb 17 (Reuters) – Poland’s Prime Minister Donald Tusk said on Tuesday he agreed with the leader of the junior coalition party not to take any steps related to toxic currency options that would transfer resulting costs to the state.
Deputy Prime Minister Pawlak proposed a law that would allow companies to walk away from loss-making currency contracts with banks or cancel them altogether, which many feared could result in expensive lawsuits against the government.
“Together with Deputy Prime Minister Pawlak we agreed not to take any steps that would transfer the effects of the options to the state, or, in effect, the taxpayer,” Tusk told a news conference broadcast on public television. Pawlak’s proposals have met resistance from some key ministries, including finance and justice, who feared the law would be retroactive and could result in hefty damages to be paid by the state.
Note the use of the term “toxic” currency options. It really is becoming the new “subprime-ski” affair.
Related links:
Another Eastern European meltdown? – FT Alphaville