Dealers in Slovakia's commercial banking market are waiting to see at what level interbank interest rates will settle as they fluctuates wildly in the aftermath of the National Bank of Slovakia's (NBS) January 7 cancellation of the securities repurchase and reverse repurchase rates.
The floating BRIBOR rates are like a pendulum that has yet to find its bearing , with market analysts only able to estimate how much and for how long the rates will swing before they find a groove.
"I see the interest rates moving up to the 20 percent level for the first 10 days of February and then dropping back down to around 14-16 percent after the first half of February as money flows out of the commercial banking sector to the NBS," said Daniel Bytčanek, the chief dealer at Poľnobanka, referring to NBS regulations that banks must meet 9 percent minimum reserve requirements at the middle and end of each month.
"So I see overall a 4-6 percent fluctuation in the Bribor rate for that time period," said Byčanik.
"I think the market's going to swing back and forth for a couple of months," echoed Tim Stephens, deputy treasurer at Tatra Banka in Bratislava. "The only time it will calm down is when the NBS cracks down on foreign investors coming into the market."
Up and down
In a dive that almost matched the dizzying trajectory when the BRIBOR shot up to 22.5 percent on January 10, the overnight interbank benchmark fell from 20.7 percent on January 20 to 12.08 on January 22. However, while the rise caught everybody in the market by surprise, the ensuing dip didn't.
"It's because so much fresh money came on the market from the outside, at least $200 million," Stephens said. "We knew it would happen."
The BRIBOR dropped due to three developments: One, foreign entities dumped hard currency in exchange for the Slovak crown, with one analyst saying that $100 million washed through the money market in two days alone, mainly through promissory notes.
Second, the gorilla in the financial sector, Všeobecná Úverová Banka (VÚB), contributed to the decline when it belatedly met the central bank's mid-January minimum reserves check.
Thirdly, Slovenská Sporiteľňa took advantage of the situation by unloading some of its voluminous retail reserves and clearing an 8 percent profit. "It was a very safe investment because Sporiteľňa had a small venture risk," Bytčanek said.
While there's consensus that the rate will float, opinions vary on what will cause the money market to stabilize and when. "I think you'll see [the interbank rates] begin drifting down," said Tom Grey, an anaylst in the corporate finance department at Creditanstalt Securities in Bratislava. "What you saw was more like an unexpected hump than a rollercoaster. The NBS can look now toward stability and a drifting position, [but] we won't know [where it settles] for another month."
That is right in line with the NBS's philosophy to watch the money supply like a hawk and let the interbank rates find a nest on their own. "Our goal is not to find a perfect Bribor rate, but to track how much money is in the sector," said Štefan Bák one of two people manning the NBS's newly-created open markets department, reflecting the bank's hardened philosophy to limit liquidity. "The commercial banks knew about these changes, and I think they know what we want to do."
Corporate treasurers and dealers differ on whether the NBS's shock therapy to tighten the money supply by eliminating the repo and reverse repo - which triggered the floating rates - will add to the Central Bank's perceived masterful handling of fiscal policy or will hurt it.
"I think the NBS perhaps was too lax at the end of last year and is being too tight now," said Creditanstalt's Grey. "It was too friendly to the banks last year, and they became spoiled. So they made a mistake last year, but they courageously decided to step up and correct it."
"It's up to the Central Bank to take a determined monetary policy approach," said a treasurer at a leading Western bank in Slovakia who asked not to be named. "The interest rates' fluctuation has made them look silly for the short-term, but the banks were making them look silly [in the first place]." Asked how the NBS was embarrassed, the treasurer said some banks' continually violated the minimum reserve regulations, and the NBS had to fight back. "This was a way for them [NBS officials] to tell these violators that they're serious, that they'll put a choke on the system. They've put on the brakes, so to speak."
Stephens was more pessimistic. "They're losing people's confidence, which is one of the worst things a national bank can face," he said. "Half of a national bank's responsibility is to control inflation; the other half is to ensure a sound and healthy bank sector. They're [NBS officials] failing on both ends. They see us [commercial banks] as the enemy, when they should be on our side."
banks are waiting for the NBS to issue daily repo tenders and to agree on loan growth," "It's very easy for the banking sector to come up with 1 billion Sk. They have government securities on their portfolios."
"The foreign speculative money is starting to dry up," said "The Central Bank is trying to get it out of its system. It's in the Central Bank's interest for the rates to stabilize at 16-18 percent without any outside money here."
That correction could be wrecked by factors outside the NBS's control, however. The Central Bank is smart and knows what it's doing, but it's caught up in a serious debate with the Administration [of Prime Minister Vladimír Mečiar] on how to administer monetary policy," said a treasurer at a leading Western bank in Slovakia, citing what he analyzed as the government's exhorting VÚB to continue extending loans, while the NBS wants to curb credit growth. "It's [the NBS] running into some pressure in terms of being able to administer that policy."
"It's on the NBS's shoulders," said Tatra Banka's Stephens. "They have to figure out what the market needs."
Asked at where they expect the Bribor rate to settle, a representative in the NBS's new, two person open markets department , which tracks the money supply, said the philosophy [CLEAR THIS UP - ASK HOW DO THEY FIGURE OUT WHAT MKT NEEDS OR WHAT THEY THINK THE MKT NEEDS]
30. Jan 1997 at 0:00 | Richard Lewis