"You're not going to see bankers jumping out of windows, but it's the biggest jump I've ever seen in any market."
Tim Stephens, Deputy treasurer for Tatra Banka
As testimony to the shock, the NBS's January 7 announcement sent interbank interest rates skyrocketing, as they leaped in a four-hour span on January 10 from 17 to 22.5 percent. "It was an extraordinary event," said Tim Stephens, the deputy treasurer at Tatra Banka in Bratislava. "You're not going to see bankers jumping out of windows, but it's the biggest jump I've ever seen in any market."
Despite the soaring interest rates, a NBS official said the Central Bank needed to act boldly after other attempts to check commercial banks' activity in the money market had not decreased the money supply.
"We tried other steps [such as raising the Lombard rate, widening the koruna's fluctuation band and increasing banks' minimum reserves]; we decided it didn't cause any change in the banks' behavior," said Peter Andrešič, head of the NBS's newly-created Open Market Operation Department. "So we started the New Year with another policy."
That policy holds for the NBS to decide each day whether to offer tenders, depending on the liquidity in the banking sector. "We will not fix the rate, and if we fix anything, it'll be the volume when we supply liquidity," Reuters quoted Andrešič as saying.
Analysts in the financial sector said the usual-prudent Central Bank, though, had gone too far. "I think it's draconian," said Stephens. "The situation wasn't that desperate for them to do it. Sure, the money supply was growing quickly, but they caught a skittish market at too questionable a time. It's driven the market crazy." Andrešič said the move had stirred up a hornet's nest. "I've gotten a lot of phone calls from angry bankers," he conceded.
Like a drug addict whose habit suddenly has been yanked away, the NBS's stop to setting the repo and reverse repo rates left commercial banks without a constant quick money fix.
With the repo and reverse repo, commercial banks could opt to deal their securities to the NBS at any time if they needed money. Now, however, they have one chance a day, if that, to turn to the Central Bank for an exchange.
Analysts predicted interest rates will remain high for the next two weeks as banks adjust to the NBS's new system. "When you have one source of funding, and you find out it's gone, what would your reaction be? Panic," said Stephens. "We're in a period of a lot of uncertainty."
No way out for companies
The new environment will make complicate banks' ability to refinance and all but short-circuit companies' interest in obtaining credit, analysts said. "Refinancing possibilities for banks are no longer as certain [as they used to be], and even if it is, it will be very, very expensive," Martin Hrozanyi, chief dealer at Slovenská Sporiťeląa, told Reuters.
As the interbank rate has gone up, so too has the BRIBOR rate, having risen to 20 percent as of January 9. "They're killing the domestic market," Stephens added. "No domestic business can afford to borrow at these rates."
"They didn't have to kill the market." "They caught the market at too questionable a time. They had new legislation on foreign assets and liability accounting that just took effect on January 1. It's a skittish market, and they turn around and do this.
The tenders, when offered, will occur at 10:00, with results released at 11:00 and allocations following later in the day. Tender announcements will include the type of tender and its style, American or Dutch. In the event the tender is for refinancing, the NBS would fix a specific volume.
16. Jan 1997 at 0:00 | Richard Lewis