Euro Debate Ignites in East EU in Face of Public Skepticism

While Greece may have one foot out the door, policy makers in the European Union’s east are reopening the debate about whether to join the euro area after years of shunning the currency during the global financial crisis.

In the Czech Republic, the prime minister said on Wednesday that joining the euro soon would help the economy after the president challenged the central bank’s long-standing resistance with a vow to appoint policy makers who favor the common currency. In Poland, the main divide between the top two candidates in the May 10 presidential election is whether the region’s biggest economy should ditch the zloty.

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“It’s quite interesting how the sentiment has shifted — I’m slightly surprised by this,” William Jackson, London-based senior economist at Capital Economics Ltd., said by phone on Wednesday. “As the story coming from the euro zone in recent years has been negative, it’s very hard to imagine how the euro case for the public would be made now.”

The obstacles are many. Romania, which has set 2019 as a potential target date, and Hungary don’t meet all the economic criteria. Poland faces legal hurdles and the Czech government has said it won’t set a date during its four-year term. As a standoff between Greece and euro-area leaders threatens to push the country into insolvency and potential exit, opinion polls show most Czechs and Poles oppose a switch.

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Euro Concerns

The appeal of the euro, which all European Union members save Britain and Denmark are technically obliged to join, suffered when the area had to provide emergency loans to ailing members during the economic crisis. While five ex-communist countries that joined the trading bloc in 2004 — Slovakia, Slovenia, Estonia, Latvia, and Lithuania — have acceded, the Czech Republic, Poland and Hungary don’t have road maps.

The region’s three biggest economies argued that floating currencies and control over monetary policy helps shield themselves against shocks like the euro crisis even if smaller countries may benefit from lower exchange-rate volatility and reduced trade costs. Facing weakening in their korunas, zlotys, and forints, some politicians in eastern Europe are questioning that logic.

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Confronting ‘Bogeyman’

The debate in the Czech Republic began again in earnest in February, when President Milos Zeman said he was “very embarrassed” that Slovakia beat the Czechs into the currency. Prime Minister Bohuslav Sobotka voiced support for “the earliest possible target date,” in an interview on Wednesday, even as his main ruling partner, the ANO party of billionaire Finance Minister Andrej Babis, isn’t ready to set a timetable.

“Even though many here don’t hesitate to present the euro as a bogeyman, at closer look we’re talking about a normal and comfortable tool to seek social prosperity,” Sobotka said in an e-mailed response to Bloomberg questions on Wednesday.

In Poland, opposition presidential candidate Andrzej Duda is trying to unseat incumbent Bronislaw Komorowski with the slogan “Yes to Europe, No to the Euro.” He has accused the president of trying to ruin Polish families by adopting a currency that will drive up prices.

Poland should enter the euro area only after “very precise analysis” and only when it benefits the country and ordinary Poles, Prime Minister Ewa Kopacz said late Wednesday. She said Duda’s campaign was misleading because it characterized the government as pushing for adoption.

While the campaign has drawn a statement from Komorowski that Poland may have to hold a referendum on adoption, data indicate that, at least since the economic crisis, the euro may actually aid new members rather than impoverish them.

Euro Gains

Since 2008, the Czech koruna has weakened 13 percent against the euro and the Polish zloty, the Hungarian forint and Romanian leu have lost more than 20 percent. That has made those nations’ exports more competitive and helped drive growth and deter inflation.

But Slovaks, Slovenes and others with wallets stuffed with the common currency have seen their earning power remain steady. Slovakia is also borrowing at negative yields, earning 0.03 percent for five year debt, compared with the Czech yields of positive 0.02 percent.

The stability of the currency is also attractive to companies such as Skoda Auto AS, whose supply chain is closely tied to its owner Volkswagen AG, and utility CEZ AS, the largest publicly traded company in the region.

“The Czech economy is very closely tied to the euro area, especially Germany,” CEZ Chief Financial Officer Martin Novak said last month. “Adopting the euro would make many companies’ lives easier.”

Opposition Obstacle

Some countries don’t have the luxury of debate. In Croatia, the economic crisis has pushed back the timeline for entry. And even though Bulgaria’s finance minister said in January that there’s political consensus to join as soon as possible, according to a report from newspaper 24 Chasa, President Rosen Plevneliev said last month he sees entry into the currency-stability test mechanism in 2018.

Romania, the EU’s second-poorest country, needs to catch up economically to benefit from the euro, central bank Deputy Governor Bogdan Olteanu said on Thursday.

“We’ll have to increase the GDP per capita by at least 10 percent in order to be reasonably competitive inside the union,” he said.

For the bigger economies, public opinion remains an obstacle, with 76 percent of Czechs opposing euro adoption, versus 16 percent who support it, according to a survey of 1,027 people taken a year ago by pollster CVVM.

In Poland, where a constitutional amendment would be needed to give the ECB the power to conduct monetary policy and issue currency, 68 percent oppose a switch, according to an October 2014 survey by pollster CBOS.

“The issue is definitely heating up in CEE. Poland is relatively better positioned for this,” Mai Doan, a London-based economist at Bank of America Corp., said by e-mail on Wednesday. “The Czech population remains very euro-skeptic, while Romania likely still has work to do in terms of real convergence.”

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Hungary’s Forint Seen Falling to Record Amid Euro-Region Turmoil

Hungary’s forint may weaken to an all-time low per euro as the currency area’s struggling economy generates “growing market nervousness,” according to X-Trade Brokers Dom Maklerski SA, the currency’s third-most accurate forecaster.

The forint may extend the developing world’s second-biggest one-month decline in the coming weeks as concern over slowing euro-area growth dents the currencies of nations with close economic ties to the region, the Warsaw-based brokerage said.

The probability the forint will drop to a record against the euro by the end of March has increased almost six-fold to 77 percent in the past month, according to data compiled by Bloomberg based on market options. The chance of gains to below 310 per euro fell to 43 percent from 74 percent in the period.

“We see risks that global markets will turn to full-scale turmoil,” Przemyslaw Kwiecien, the Warsaw-based chief economist at X-Trade Brokers, said by phone today. The major concern is a long period of accommodative monetary policies might not be enough to spur global growth, he said.

‘More Elevated’

Sluggish growth in the euro area and the first negative inflation rate in more than five years pose risks to Hungary’s economy, which conducts 75 percent of its trade with the European Union. In a bid to support growth, the National Bank of Hungary has pledged to keep its benchmark rate unchanged at a record- low 2.1 percent until the end of the year after ending a 24-month rate-cut cycle in July.

The forint rose 0.1 percent to 319.36 per euro by 4:08 p.m. in Budapest after retreating as much as 0.4 percent to 320.86, the weakest in three years. The currency fell to a record 324.24 in Jan. 2012, when Hungary requested aid from the International Monetary Fund and the nation lost its investment-grade credit rating.

XTB’s Kwiecen said he will probably change his forecasts next week to reflect “more elevated” exchange rates for the first half of the year. On Dec. 11, he predicted a 311 forint-per-euro rate for the end of March, according to data compiled by Bloomberg.

Hungary’s government signaled it won’t intervene to prop up the currency, with state secretary at the Economy Ministry Andras Tallai saying the cabinet “is interested in a forint exchange rate that supports sustainable growth.”

‘Unfavorable Sentiment’

The decline in Hungarian assets, including the forint, is caused by “unfavorable global sentiment” stemming from the Russia-Ukraine conflict, the plunge in oil prices, looming Greek elections and the mixed economic performance of developed nations, the central bank said in an e-mailed response to questions yesterday.

“The currency has eroded earlier resistances,” Monika Kiss and Akos Kuti, economists at Equilor Befektetesi Zrt. in Budapest, wrote in an e-mailed report today. It’s showing a higher correlation with Russia’s credit default swaps due to increased regional risks, they said.

To contact the reporter on this story: Marton Eder in Budapest at [email protected]

To contact the editors responsible for this story: Wojciech Moskwa at [email protected] Chris Kirkham, Matthew Brown

Romanians Reject Euro Loans After Hungary Disaster: Mortgages

Romania, using record-low interest rates to rebuild a housing market devastated by the economic crisis, is forcing homebuyers like Vlad Popescu to abandon cheap euro-denominated mortgages in the name of financial stability.

In October, the government changed the terms of a four-year-old program for euro loans to only cover credit in the Romanian currency, the leu. In the following months, banks, led by Erste Group (EBS) Bank AG’s Banca Comerciala Romana SA and BRD-Groupe Societe Generale SA, accelerated leu mortgage lending. It grew at a record annual pace of 90 percent in December.

Romania is providing $ 4.2 billion in loan guarantees to first-time homebuyers such as Popescu. The government is betting that borrowers in the European Union’s second-poorest country will accept higher payments in exchange for local currency loans that won’t jump in cost if the leu plunges against the euro. In Popescu’s case, it’s working.

“I got used to the idea,” said Popescu, who initially sought a loan in euros for his two-bedroom, 295,000-lei ($ 88,000) Bucharest apartment before taking a leu-or-nothing offer for a government guarantee. “My monthly payments went up by 300 lei, but they’re fixed now and I don’t expect any significant changes in the next few years.”

Hungarian Troubles

The changes come after hundreds of thousands of homebuyers in neighboring Hungary took out Swiss-franc loans, only to be hurt by a slump in their own currency. The forint has depreciated by about 75 percent since 2008, when most of the loans were issued.

The plan guarantees 50 percent of the value of mortgages worth as much as 75,000 euros, with a 5 percent down payment. That reduces the risks for banks, allowing them to make cheaper loans. On Jan. 8, the Romanian central bank lowered its benchmark interest rate to a record 3.75 percent, the latest in a string of cuts that began in July 2013.

The revised government program is intended to protect leu-earning home buyers against exchange-rate swings, such as when the leu plunged 12 percent against the euro at the end of 2008, driving up euro-denominated loan payments.

The guarantees — $ 602 million for this year alone — are also designed to counteract a squeeze from western lenders that have cut back euro funding to their Romanian operations before the release of EU-wide stress-test results in November.

Limiting Loans

Romania has lagged behind Poland and neighboring Hungary in limiting foreign-currency loans. Hungarian Prime Minister Viktor Orban effectively banned such debt in 2010, while Poland allows it only for borrowers whose incomes are based in foreign currencies.

After coming to power in 2010, Orban effectively banned foreign-currency mortgages. It was part of a series of measures aimed at phasing out such loans and helping hundreds of thousands of Hungarians whose repayments of predominantly Swiss-franc denominated loans ballooned in the aftermath of the global financial the crisis.

In 2011, he forced banks to swallow $ 1.7 billion in losses on the early repayment of some mortgages at below-market exchange rates, expanded a program allowing debtors to temporarily repay their mortgages at fixed exchange rates and pledged to take further steps to eliminate all such loans.

About 100,000 Romanian borrowers took part in the government’s initial four-year program, with the state guaranteeing loans amounting to about 4 billion euros ($ 5.5 billion).

Jagged Skyline

That’s good news for developers struggling to recover from a real estate collapse that left the Bucharest skyline marked by half-finished office buildings and idle cranes. On the city’s outskirts, hundreds of buildings and houses stand empty along unpaved roads.

“This program is the best idea the state has had in years,” Alexandru Tiron, a construction engineer, told Bloomberg. “It will be extended. If not, the construction market will plunge again and take the entire economy with it.”

Bad loans in Romania stood at 21.7 percent of all lending at the end of October, the sixth-worst ratio in the world in 2012, according to World Bank data. That has left credit scarce.

The state-guaranteed loans are the exception. With a default rate of 0.1 percent, they now account for 90 percent of new mortgages, according to Alpha Bank Romania SA Chief Executive Officer Sergiu Oprescu.

‘Good Start’

“The program had a pretty good start, but lately it has received a very strong boost from the central bank’s rate cuts,” he said in an interview in Bucharest. “It totally eliminates the foreign-exchange risk.”

The average leu mortgage rate fell to 6.11 percent at the end of last year, less than half of 2009’s record-high of 14.76 percent, central bank data show. In comparison, euro mortgage rates averaged 5.87 percent, down from 9.17 percent at the end of 2008.

Now local developers are rebuilding after a two-year recession starting in 2009 that torpedoed projects backed by international companies such as Charlemagne Capital Ltd. (CCAP) and Asmita SA.

The 120 million-euro Asmita Gardens project in Bucharest, Romania’s biggest private residential investment, failed in 2011. A few streets away, developer Tiron sold out his third apartment building in six months at about 800 euros per square meter. That’s 24 percent less than today’s prices at Asmita’s project, built before the crisis.

‘Extraordinary Demand’

“There’s an extraordinary demand for cheaper, smaller apartments,” Andreea Comsa, managing director of real estate broker Premier Estate SA said in an interview in Bucharest. “Local developers are buying land and building tailor-fit houses for the program. They sell very quickly.”

The average apartment price in Romania plunged to 898 euros per square meter at the end of 2013 from more than 2,000 euros in 2008, an index from property listings website and consultancy shows. Still, the government’s First Home program may be keeping prices artificially high, according to Andrei Radulescu, an analyst at Romanian brokerage SSIF Broker SA told Bloomberg.

“The program prevented a possible natural adjustment of the market that would have brought home prices closer to their fair value,” he said. “Without it, I think the banking sector would also have adjusted more quickly.”

The government is pledging to continue its First Home program “for as long as the market needs it,” according to the Finance Ministry. After its initial euro-based plan lured 14 lenders, the revamped program is attracting more.

ING Joins

ING Romania Chairman Misu Negritoiu said his bank applied to join this year and wants to tap as much as 50 million lei in state guarantees.

Half of all lending at BCR, Romania’s biggest bank by assets, is from First Home loans, with a portfolio now at about 5 billion lei, retail manager Andrew Gerber said.

“I see a huge amount of potential,” Gerber said in an interview from his office in downtown Bucharest. “It’s the right place to be if we want to build a sustainable mortgage market.”

Popescu, meanwhile, is looking forward to moving into his new 85-square-meter (915-square-foot) home in Titan, a neighborhood in the east of the capital that got its name from a cement factory. Before then, though, he plans to spend the last of his savings on a trip to Paris with his girlfriend.

“It was either that or a new couch,” he said.

To contact the reporters on this story: Irina Savu in Bucharest at [email protected]; Andra Timu in Bucharest at [email protected]

To contact the editors responsible for this story: James M. Gomez at [email protected]; Balazs Penz at [email protected]; Rob Urban in New York at [email protected]

Central banks step in again as emerging currencies resume rout

By Natsuko Waki

LONDON (Reuters) – The Russian rouble hit record lows against the euro on Thursday and currencies in South Africa and Hungary hit multi-year troughs in the latest wave of an emerging market asset sell-off threatening global economic stability.

India’s finance ministry also said the country would take any steps necessary to ensure financial market calm.

Russia’s central bank pledged to make unlimited interventions if the rouble’s exchange rate strays outside of its target corridor. Romania indirectly intervened to prop up the leu.

Faced with the same kind of risk-averse mood among investors, Hungary cut back a sale of 12-month Treasury bills in which yields were driven up by almost 67 basis points.

Fears about emerging economies intensified after moves this week by Turkey, South Africa and India failed to halt a wholesale capital flight. The Federal Reserve’s decision to withdraw more of its monetary stimulus and weak Chinese data added to the concerns.

“The pressure on these currencies has been relentless and it seems like places like South Africa, Hungary and Turkey are trying to force policymakers to bring real rates to much higher levels,” said Manik Narain, emerging market strategist at UBS.

“Rate hikes have been effectively rejected by the currency markets… Institutional investors have remained faithful (but) it may be that some of these positions are starting to crack.”

The benchmark MSCI emerging equity index fell 0.8 percent (.MSCIEF) to a fresh 4-1/2 month low.

The huge outflows from emerging markets were triggered by the Fed’s decision to taper off a huge stimulus package that has pumped money into the world financial system, much of it going into higher-yielding emerging market investments.


Russia’s central bank said it would launch unlimited FX interventions if the rouble’s exchange rate strays outside of the corridor it targets against a dollar-euro currency basket.

Earlier, the Russian rouble hit a record low of 48.21 per euro on Thursday and also fell to the lowest level since March 2009 against the dollar.

The five-year Russian bond yield hit a 16-month high, with the yield rising 70 basis points this week alone.

Romania’s central bank intervened indirectly in the market to support the currency, bringing the leu up around 0.4 percent against the euro.

Hungary’s forint fell 1 percent to a fresh two-year low of 312.65 per euro, extending losses made after the country’s central bank delivered a surprise 15 basis points rate cut last week.

Budapest was forced to cut its 12-month bill sale by 15 billion forint ($ 66.30 million) at Thursday’s auction, with the average yield jumping 67 bps from the previous sale just two weeks ago.

The Turkish lira fell more than 1 percent to 2.2810 per dollar, approaching record lows set earlier this week and fully erasing gains made after the central bank surprised the market with a whopping 425 basis point rate hike.

Local stocks lost 1.3 percent. The lira’s one-month implied volatility shot above 20 percent on Wednesday, its highest in nearly 5 years.

The South African rand also ignored a surprise 50 basis point hike from the central bank on Wednesday, hitting a fresh five-year low of 11.38 per dollar.

The yield on benchmark government bonds jumped 36 bps to 7.36 percent.

Pressure is mounting on other central banks to act to counter inflation and support their currencies, including Mexico.

The peso hit 18-month lows last week and the country’s inflation has shot up well above the central bank’s limit this month. The central bank said on Wednesday it is weighing whether monetary policy needs adjusting.

(Additional reporting by Jamie McGeever and Sujata Rao Editing by Jeremy Gaunt)

Hungary Rate-Cut Resolve Challenged by Investors as Forint Drops

The Hungarian central bank’s commitment to continue a record-long easing cycle is being challenged by investors retreating from emerging markets.

Bets for three-month interest rates in three months rose almost 1 percentage point in the past two days, pricing in more than an 85 basis-point increase in the benchmark rate, forward-rate agreements show. Hungary failed to sell the planned amount of one-year Treasury bills at an auction today as yields jumped. The forint fell to its weakest against the euro in two years.

Policy makers in Budapest yesterday signaled there’s room to for rate cuts even as peers from Turkey to South Africa tightened policy. Magyar Nemzeti Bank President Gyorgy Matolcsy said that Hungary’s current-account surplus sets it apart from more vulnerable economies such as Turkey, which pushed through an emergency rate increase this week to halt a run on the lira. That may not be enough to convince investors, according to Benoit Anne, a strategist at Societe Generale SA. (GLE)

“These days, the game is about positioning for investor expectations,” Anne, who heads emerging-markets strategy at Societe Generale in London, said in an e-mail today. “If the hedge funds managed to score against” the Turkish and South African banks, “there is absolutely no reason why they should not be able to score against” the Hungarian monetary authority.

The forint dropped 0.9 percent to 311.78 per euro by 11:45 a.m. in Budapest, the weakest in two years. It has lost 2.5 percent in two days, the steepest slide among 24 emerging-market peers tracked by Bloomberg. The country’s sold 35 billion forint ($ 153 million) in 12-month bills today, less than the 50 billion forint planned, as the average yield jumped to 3.51 percent, the highest since October.

Sensing Blood

“It seems that fast money has sensed blood and is picking new victims,” Krzysztof Madej, who manages more than $ 250 million at Warsaw-based mutual fund Altus TF, said by e-mail today. “While they’ve learnt there’s no use fighting the” U.S. Federal Reserve or the European Central Bank, “nobody will defend emerging markets. Only higher rates can do that.”

The Federal Open Market Committee said yesterday it will cut monthly bond purchases by $ 10 billion to $ 65 billion, keeping the pace of the reduction from the previous month. Monetary-policy makers across emerging markets are weighing the Fed’s move against the need to boost economic growth.

Rates Rise

The South African Reserve Bank unexpectedly increased its benchmark rate yesterday, following central banks in countries including Turkey, India and Brazil that tightened monetary policy to bolster their currencies. Romania lowered its benchmark rate to a record 3.75 percent on Jan. 8, while Poland left borrowing costs unchanged this month.

Poland’s fundamentals are strong and there’s no reason for the zloty to weaken, Eugeniusz Gatnar, a member of the Polish central bank’s management board, told the PAP news service today. The bank “is ready to take appropriate decisions” if volatility becomes excessive, he said.

In Hungary, the currency’s drop has been “too fast and too big” and the central bank is monitoring “very carefully” the forint’s trajectory, non-executive rate setter Gyula Pleschinger said in an interview yesterday.

Pleschinger was outvoted in each of the last five rate meetings in 2013 after urging slower cuts than the majority. The central bank slowed its rate reductions to 15 basis points on Jan. 21, lowering the benchmark to a record 2.85 percent, following 20 basis-point moves in the previous five months and 12 quarter-point cuts between August 2012 and July 2013.

‘Telltale Result’

“This is precisely the market situation in which overly low rates in Hungary will have their telltale result,” Tatha Ghose and Barbara Nestor, London-based strategists at Commerzbank AG, wrote in an e-mailed report today. “The rate-cut cycle could be over quickly.”

Matolcsy yesterday declined to answer questions about the forint’s decline and its potential impact on rate policy. The central bank didn’t immediately answer e-mailed questions on the same subject today.

Hungarian assets were resilient after the Fed first started to pull back stimulus as the central bank slowed the pace of rate cuts. In the past two days, the forint’s decline against the euro was the world’s third biggest after the Guyanese dollar and the Malawian kwacha.

The plunge shows that investors are looking past Hungary posting the slowest inflation since 1970 and a current-account surplus of 2.4 percent of economic output, according to Gergely Palffy, an analyst at Budapest-based Buda-Cash Brokerhaz Zrt.

“Each word that supports a scenario of the central bank stopping rate cuts or maybe going higher may calm the markets and stem the forint’s drop,” Palffy said in a statement on the brokerage’s website. “If there’s no such statement, then there’s a problem and the Turkish story may come when they’ll pound the forint until the central bank gives in.”

To contact the reporters on this story: Zoltan Simon in Budapest at [email protected]; Andras Gergely in Budapest at [email protected]

To contact the editor responsible for this story: Balazs Penz at [email protected]