Roundup: Cyprus banking crisis briefly dampens Central, Eastern European economies
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E-mail Xinhua, April 11, 2013
The Cyprus banking crisis has sent a shockwave across Central and Eastern European economies (CEE), dragging their currencies down and slightly raising the costs of government bonds.
However, despite such disturbance, the CEE economies survived the height of the crisis almost unscathed.
The forex markets in the region became more volatile following a controversial decision by the Cypriot government in mid March to put high taxes on bank deposits in a bid to secure rescue loans from international creditors.
Market jitters receded later after the planned approach was abandoned amid public outcry, replaced by measures to restructure the country's oversized banking sector.
Since the start of Cyprus' banking saga, the Hungarian forint had been the worst performing currency in the region and hit a 14-month low in its exchange rate against the euro on March 19.
But the havoc of Hungarian currency could be hardly attributed only to Cyprus spillover. Rating agencies stroked almost simultaneously penalizing "the weak predictability and credibility of Hungary's policy framework" and low prospects of growth, as Standard & Poor's (S&P) explained.
Other moves included Moody's downgrade of four major Hungarian banks on March 18 and a negative outlook on Hungary's sovereign rating two days later by the S&P.
In this tense environment the Cyprus crisis amplified the investor's risk aversion toward Hungary's financial market, and the cost of government borrowing went up, but managed to recoup as calm restored later.
While Romania, in which Cyprus ranks as the fourth largest foreign investment source, has seen the impact of the Cyprus crisis somehow mitigated by investors' strong appetite for Romanian government securities.
"We would risk claiming that the Cyprus capital controls constitute a nuisance for selected companies, rather than a serious macroeconomic risk for Romania, Czech Republic, Hungary or Poland," said Mateusz Szczurek, senior economist at ING Bank Poland.
Poland was somehow a collateral victim of the Cyprus banking crisis, despite the country's reputation of solidity and its bid to qualify its government securities as a safe heaven for portfolio investors.
There was a rally on the Polish bond market, but the lagging economy and the spectrum that the National Bank of Poland may reduce its key interest rate added volatility in the market.
So the Polish zloty "danced to the music played by global factors," as ripples came from Cyprus crisis, noted Adam Narczewski, analyst at XTB. The zloty-euro exchange rate on March 22 reached its lowest since February, noted Narczewski.
The Czech koruna turned out as the most sensitive to the Cyprus crisis, as the currency lost 1.19 percent of its value against euro between March 15 and April 2, when the exchange rate went down to 25.880 koruna for one euro.
The answer is simple as to what makes it so fragile in volatile times: the economy floundered in recession since the end of 2011, experts said. Endi
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