Eastern European financial markets experienced an interesting development during the week ending May 29. Fallout from the Russian financial crisis prompted investors to take profits throughout the whole region. On May 27, which was coincidentally the day of last year's attack on the Czech crown, the Czech currency fell more than two percent against the Deutsche mark.
However, this had only limited impact on the Slovak crown, which had been traded at strong levels and in a very narrow range of between 0.75% and 1.2% on the weaker side of the fluctuation band. Driven by losses to the Czech crown, the crown weakened on May 27 to 1.9% on the band's depreciation side.
But low foreign interest and the less liquid Slovak money and foreign exchange markets protected the Slovak currency in the following days. The Czech crown strengthened in highly volatile trade during the next two days after the Czech central bank said that positive developments in domestic demand and the external account meant the bank's 1998 inflation target could be achieved. Also, improved sentiment toward Russia helped both currencies close at much stronger levels.
Interest rates eased further as the banking sector maintained long reserves throughout the past two weeks. The National Bank of Slovakia (NBS) didn't continue in its refinancing operations as the maturing 8 billion Sk from the repo tenders were gradually replaced by inflows from maturing goverment bonds. Since these inflows were longer than the outflows and the new bond auctions didn't manage to drain enough liquidity, the market stayed above the required minimum level by 4-5%.
In the last days of the month, the NBS conducted a sterilization repo in which it drained 4.6 billion Sk at yields of 12-13%. The ongoing excess liquidity finally helped to bring down the longer end of the yield curve. At the May 20 auction of 5-week T-bills, the Finance Ministry rejected all bids as the market was charging them a substantial premium over the interbank rates. But at the May 19 auction of one year state bond the ministry sold bonds worth 2.45 billion Sk at average yield of 27.054%. The maximum accepted yield fell to 27.49% from 28.99% recorded at the last auction.
Increased foreign interest was reflected in the growth of total demand, which reached 9.42 billion Sk, up from 6.97 billion at the last auction. The growing interest in state bonds was fuelled by the launch of the Slovak Eurobond issue, in which the goverment borrowed a total of $750 million for 3-5 years in a three-currency issue. At the May 26 one year bond auction, the ministry rejected all bids totalling 10.99 billion Sk. It had the expected impact on interest rates, which slid down and moved even 6-month funds below 20%.
There is some room for a further easing of longer term interest rates, while papers with shorter tenors seem to be staying around 10-15%. The crown will likely fluctuate between 1.0-2.4% on the band's weak side.
4. Jun 1998 at 0:00 | Oto Mohňanský