Złoty’s Ups and Downs

The recent data from the Polish financial market have brought alarming news. The Polish złoty, which until last summer was exceptionally strong, is now plummeting and the Warsaw Stock Exchange has been severely hit by the crisis.

In the second half of February the Polish zloty slid to its lowest level in five years. In comparison, the euro rate hovered around 4.9 złotys, the American dollar cost 3.9 złotys and the value of Swiss francs amounted to 3.3 złotys. Right before Poland’s entry into the European Union, one could previously observe a systematic growth tendency of the Polish currency, which lasted until last June.

At present the zloty is not only weaker than the Hungarian forint and Czech crown, but even the Ukrainian hryvnia. In countries like Turkey, Mexico and Brazil, which are ordinarily more prone to currency fluctuations, the situation is much more stable. Such a considerable slump of the Polish zloty is astonishing since the economic situation of Poland is better compared to the aforementioned countries.

According to market analysts, investment funds are to a large extent responsible for the situation. Since the analysts bet that the zloty would plummet, they are now doing their best to make it weaker in order to make a profit. The intrigue has its source in the financial centres of London and New York.

The reason for foreign investors fleeing the region is their conviction that Poland is not coping with the crisis as well as it was expected. “Investors are afraid to take risks and Poland is considered to be one of the high risk regions,” explained Piotr Bielski, BZ WBK economist in Dziennik. The Polish economy is severely affected by the Russian economy due to the decline of the ruble. It appears that the entire Central and Eastern European region of emerging markets is suffering.

As a result, the burden of financial debt is increasing for banks and many companies face problems with currency options. Since almost 60 percent of home loans are denominated in Swiss francs, the debt of almost a million Polish households has increased and if worst comes to worst, banks may have to force people from their homes or at least put more severe restrictions on real estate purchases in the future.

Specialists are seeking solutions to remedy the situation and make Poland more attractive to investors. For example, Poland’s entry into the exchange-rate mechanism known as ERM II could increase the country’s credibility due to the chance of joining the euro zone after two years of being in the euro “waiting room.” In such a case, the Polish currency would be constantly connected with the European one and each greater fluctuation would force the Central Bank to intervene.

“The zloty conversion to euro is more attractive at present than it was before the financial crisis,” said prof. Leszek Balcerowicz in Brussels. Trade unions unexpectedly supported euro adoption, however the most influential parties ? the governing PO and its opposition, PiS – have not come to an agreement on the changes in the constitution without which entry to ERM II could be a risky endeavour.

Jan Guz, the chairman of OPZZ, one of the most influential trade unions in Poland, justified his support saying: “Thanks to the euro, there will be no social dumping, [and] it will be easy to compare salaries of people employed by one corporation and working in different European Union countries.” In this way, Polish salaries ? at present lower compared to those in France or Germany for example – may rise to European standards.

Although some experts have reservations about Polish entry to ERM II in 2009 due to the crisis, the Polish government maintains its intention to adopt the euro in Poland in 2012, since euro zone entry is considered to be profitable for the Polish economy in the long run.

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