|
|
|
|
|
||
|
||
| News | Business | Feature | Opinion |
Tourist Info |
Classifieds |
Rocky ride for crown
By Rob Patton The National bank forced to intervene after currency drops to its lowest level since May Worldwide stock-exchange turmoil and growing uncertainty over the Czech government's viability pounded the Czech crown in one of its most tumultuous periods since the currency crisis last spring. The crown's plunge -- which reached 19.20 Kc to the German mark Oct. 30 -- prompted the Czech National Bank (CNB) to prop it up for the first time in more than five months. Recent central-bank actions suggest the bank supports an exchange rate with the German mark of 18.40-19.20 Kc to the mark, analysts say. Economists are still undecided on the long-term outlook for the currency and the fundamental strength of both the Czech economy and government. Patria Finance treasurer Jan Brozik said the instability of Prime Minister Vaclav Klaus' ruling coalition is overshadowing positive economic indicators, such as a narrowing of the trade imbalance. Brozik said if that instability ever did disappear, "the figures coming out would be good, and people would likely buy crowns." Jiri Krovak, an economic analyst at Wood & Co., disagreed. Rising inflation and external (foreign) debt, a widening public-finance deficit and sluggish growth outweigh the good news on the trade front, he said. "There's improvement in one of five indicators, while four in five are deteriorating," Krovak said. The recent currency crises in Southeast Asia will make investors more cautious about which emerging markets to invest in, Krovak said. And with its weak economic performance and rocky political prospects, the Czech Republic simply won't make the grade. However, CNB Governor Josef Tosovsky said rational currency markets have already taken political instability into account and minimized the threat to the crown. Not so, Krovak contended. "Many investors are just waiting for some sign of instability" to unload their crowns, he said. When this comes, he said, his firm predicts the crown will fall to 20.5 to the German mark But other market players, such as Raiffeisenbank bond dealer Andrew Fuchs, stressed that Czech political institutions are relatively stable despite the current uproar. Fuchs predicted the crown would drop no further than to 19.50 Kc to the mark in coming months. The turmoil that prompted the bank's intervention began Oct. 23, with the resignation of Foreign Minister Josef Zieleniec. The crown responded quickly, dropping from 18.55 to 18.64 to the mark. The global plunge in stock markets, sparked by the Hong Kong currency crisis, pushed the crown further down. Nervous investors sought security in more stable currencies. On Oct. 28, a national holiday, the crown sank to 19.32 to the mark, its lowest level since May, in London trading. It then partially recovered to around 19.15 Kc to the mark. The next day, Tosovsky told the American Chamber of Commerce that the central bank would intervene to defend the crown if it fell below what the bank considers a justifiable level. That came Oct. 30, when the crown slipped to 19.20 to the mark. The bank then intervened, swapping an undisclosed amount of foreign currency for crowns. It was the first intervention since the CNB allowed the crown to float on May 26. The action, which analysts called relatively minor, rallied the crown to 19.13 Kc to the mark, but it fell back to 19.17 Kc by the end of the day on Oct. 30. Several analysts questioned the wisdom of this intervention. "The timing could have been better," Brozik said, explaining that he did not believe there had been any real threat to the crown. The CNB acted again Oct. 31, raising the two-week repo rate from 14.5 to 14.8 percent. By making it more attractive for banks to deposit money in the CNB, the move was meant to shrink the supply of crowns, which should drive up their value. The exchange rate did not change after the rate increase, however. On Nov. 3 it strengthened to a rate of 19.02 to the mark. Tosovsky said that CNB decisions are guided by the bank's exchange-rate policy of "managed floating." If the central bank believes that certain fundamental economic changes -- such as the trade or public-finance deficit -- are driving exchange-rate movements, it will not get in the way. But the bank will act to smooth out fluctuations not related to changes in those fundamentals. Tosovsky said that he did not believe the crown's recent jolts are related to fundamentals. Tosovsky stressed the big picture. The crown has lost only about 5 percent of its value against the mark and around 20 percent against the U.S. dollar since 1991, he pointed out, while the Hungarian forint and Polish zloty have lost many times as much.
|
Home
Back to archive contents