E. Europe C. Banks Step in Verbally to Prop up Forex

Central banks in Central and Eastern Europe (CEE) launched a coordinated verbal intervention Monday to try to stop the steep depreciation of currencies in the region, which has hurt the emerging economies and put the brakes on years of fast growth.

Poland's central bank said it may fight off the impact of the zloty depreciation, and said cooperation and exchanges of information between national banks in the region have intensified.

Rising global risk-aversion has eroded about a third of the zloty's value against the euro, prompting some analysts and central bankers to say high volatility could be a threat to the government's plan to join the pre-euro Exchange Rate Mechanism (ERM-2) this year.

"In the central bank's view, the macroeconomic situation of Poland does not justify such a scale of zloty weakening. The central bank can undertake action in order to avoid the negative impact of zloty volatility on the economy," central bank Governor Slawomir Skrzypek said in a statement.

Romania's central bank, which last year in October thwarted a speculative attack on the leu and which jealously guards the currency against what it sees as excessive depreciation, said it stood ready to fight speculators.

"The excessive depreciation of some local currencies is not justified by economic fundamentals and can create destabilizing effects," central bank governor Mugur Isarescu told a news conference. "The central bank is ready to act against destabilizing exchange rate moves."

Western banks remain committed to their subsidiaries in Eastern Europe and stimulus plans in the West will boost demand for products made in Eastern European countries, meaning the long-term fundamentals for these economies are good, the Hungarian central bank said in a statement.

AP

"While some exchange rate adjustment is indeed appropriate in these economies, excessive depreciation which is not justified by economic fundamentals can be disruptive and should be avoided," the bank said. "The Hungarian central bank is ready to take action if necessary to prevent disruptive movements in the forint's exchange rate."

The Czech central bank also said the sharp drop in the crown and other currencies in the region is overdone.

The Hungarian forint was up more than 3 percent after the news, the Polish zloty rose 2 percent, and the Czech crown was up more than 1 percent. The Romanian leu was stable.

The zloty and the forint have fallen by more than 10 percent versus the euro so far this year, the leu lost around 6 percent while the crown is more than 4 percent down.

Western banks with branches in Central and Eastern Europe have been slammed last week in a Moody's report for their exposure to hard currency loans in the countries with fast-depreciating currencies.

UniCredit analysts said the quick appreciation of the CEE currencies after the announcement showed that the market was still holding long positions in euros.

"The broader question obviously remains, however, how sustainable the support for regional foreign exchange from the comments will be," Martin Blum, UniCredit analyst, wrote in a market note. "It's far from clear to us that comments alone will be sufficient to support regional FX."

Central and Eastern European monetary authorities will be forced to keep interest rates high to avoid further slides in their currencies, despite their slowing economies which would need lower rates, analysts said.

The weakening currencies have made it difficult for eastern Europeans to reimburse loans denominated in hard currency so the central banks have to strike a balance between protecting the exchange rates and fending off the effects of the global financial crisis on the real economy.

- Reuters contributed to this report.

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