Spectator on facebook

Spectator on facebook

NBS upholds the crown, awaits renewed attacks

Ever since foreign traders all but took the Czech crown (Kč) hostage in the last three weeks of May in speculative trading caused by that country's poor economic results and political instability, reverberations from the heavy dealing in Prague shook the Slovak crown (Sk) as well. The National Bank of Slovakia (NBS) successfully stabilized the Sk by throttling the money supply and relentlessly fixing the Sk's basket, but some market observers think that the victory will be a short-lived one, saying the Slovak currency will have to walk the path of its Czech mate and depreciate.
The main indicator that the Sk will go down more when the NBS relaxes its tight measures is the fact that the Sk lost value right after the Kč, one analyst said. "When the Czech crown fell by 15 percent and its fluctuation band was eliminated, the Slovak currency followed immediately," said Martin Kabát, an analyst with the brokerage firm Slávia Capital.

Ever since foreign traders all but took the Czech crown (Kč) hostage in the last three weeks of May in speculative trading caused by that country's poor economic results and political instability, reverberations from the heavy dealing in Prague shook the Slovak crown (Sk) as well. The National Bank of Slovakia (NBS) successfully stabilized the Sk by throttling the money supply and relentlessly fixing the Sk's basket, but some market observers think that the victory will be a short-lived one, saying the Slovak currency will have to walk the path of its Czech mate and depreciate.

The main indicator that the Sk will go down more when the NBS relaxes its tight measures is the fact that the Sk lost value right after the Kč, one analyst said. "When the Czech crown fell by 15 percent and its fluctuation band was eliminated, the Slovak currency followed immediately," said Martin Kabát, an analyst with the brokerage firm Slávia Capital.

At the beginning of the May 19 week, the Sk depreciated 7 percent, but it later regained some of its value. At the end of the last week in May, it was 5 percent below parity.

Marián Jusko, the NBS vice-governor, said that the attack was part of a global run of speculation against currencies from emerging market countries which suffer from a negative balance of payments and budget deficits that make their currencies particularly sensitive and volatile.

But Jusko said the Sk has now stabilized, adding that "it is clear that we have not intervened excessively, the NBS vice-governor said. "In addition, if we need to strengthen our foreign exchange reserves, we have international support, but I do not see any need to issue bonds on foreign markets right now."

Kabát dissented. "In my opinion, the NBS focuses only on short-term solutions and waits for a stable [exchange rate of the] Czech crown. Then they are going to implement the long-term measures, i.e. shift the value of the Slovak crown so that it is sustainable as far as foreign exchange reserves are concerned."

Sergej Kozlík, vice-premier in the government and the minister of finance, agreed with the first part of Kabát's statement, but refuted any rumors that the government would devalue the Sk. "The NBS interventions cost us only $300 million, which is about 5% of our foreign exchange reserves," Kozlík said. "There is no more pressure and our currency's development is tranquil [???]. We made a decision not to change the fluctuation band."

One big reason the NBS warded off speculative trading, Kabát said, was through close cooperation with commercial banks. "Seeing the situation in the Czech Republic, commercial banks [in Slovakia] and the [Slovak] central bank made a gentlemen's agreement that [the central bank] would not have to use any regulative measures," Kabát said.

According to Kabát, domestic banks stopped quoting crowns to foreign banks, freezing the market. "It's clear that this makes the situation easier for us," the NBS's Jusko told the Národná Obroda daily. "If the banks continue this policy, it is the most rational decision they can make."

At the end of May, the interbank market still operated under internal agreements. That means that foreign players could not use their usual tools: borrow crowns from domestic banks and then convert them to foreign currencies and hope for a devaluation. Ordinarily under that scenario, the difference between the previous and the new exchange rate would bring in more than enough profit to pay back the interest to Slovak banks and still take home plenty.

Under pressure

According to Kabát, what the Sk does next will be determined by how foreign investors react when the NBS lifts its restrictive measures. But he thinks that the Sk will have to at some time give into pressure of the weaker Czech currency. "Trade with the Czech Republic makes up 30% of our foreign trade," Kabát said. "That's why the Czech/Slovak crown exchange rate is so important. Since the Czech crown has devalued, the Slovak crown will not be sustainable in the long-term without devaluation."

However, Jusko said that the situation in the Czech Republic is quite different and that the relationship between two currencies is overrated. "We have made calculations and the interdependency between them is not that big," he said. [BUT HE DIDN'T ANSWER THE QUESTION!]

The processing of personal data is subject to our Privacy Policy and the Cookie Policy. Before submitting your e-mail address, please make sure to acquaint yourself with these documents.

Top stories

Biker gang complex in Dolná Krupá raises questions

What does the Russian bikers’ gang Night Wolves do in the Slovak village of Dolná Krupá?

The complex in Dolná Krupá

Blog: How business mentoring can change our schools for the better

Business mentoring benefits both involved parties and has the potential to change Slovak schools for the better.

Junior Achievement Slovakia organises various events, including a fair of student companies.

Here is how I measure the speed of integration

Babiš proposes to end war, poverty and religious extremism with a snap of our fingers. Why hasn’t anybody else thought of this?

Andrej Babiš, Czech prime minister

How rock music helped bring down the totalitarian regime Video

A new film shows that Rock & Roll, forbidden in the Soviet Union, helped to end the Cold War.

Illustrative Stock Photo