Can the euro protect us ?

THE SLOVAK prime minister called it a ‘talisman’ to shield Slovakia from the global crisis, bankers have suggested it is one of the safest currencies and, according to market watchers, it will make an additional, huge contribution towards the country’s attractiveness as an investment destination. It’s the euro, which Slovakia adopted on January 1, 2009, to become the eurozone’s 16th official member.

THE SLOVAK prime minister called it a ‘talisman’ to shield Slovakia from the global crisis, bankers have suggested it is one of the safest currencies and, according to market watchers, it will make an additional, huge contribution towards the country’s attractiveness as an investment destination. It’s the euro, which Slovakia adopted on January 1, 2009, to become the eurozone’s 16th official member.

The euro is an immense opportunity for Slovakia, according to the country’s central bank.

“The current economic crisis clearly shows the importance of a stable anchor for small and open economies, which from time to time might be exposed to serious turbulence on the financial markets,” said the governor of the National Bank of Slovakia (NBS), Ivan Šramko, in a statement on January 1.

The euro can be used to attract more investment to Slovakia, generate more foreign trade and bring about faster growth in the standard of living, Šramko said.

Though market watchers share state officials’ optimism about the new currency, they suggest that even if the euro provides a kind of shield, it cannot fully neutralise the effects of the global economic crisis.

The process of adopting the euro started to ease the impact of the financial crisis on Slovakia in the second half of 2008, after the conversion rate of the Slovak crown to the euro had been fixed, said VÚB bank senior analyst Martin Lenko.

Due to uncertainties surrounding the crisis and an anticipated slowdown in the growth of developing economies some of their relatively weaker currencies came under pressure, Lenko told The Slovak Spectator.

“However, the exchange rate of the Slovak crown towards the euro, because it was fixed, was the least volatile and recorded the slightest change when compared to the exchange rates of other currencies in the Central European region,” Lenko said.

The Slovak crown strengthened towards the euro in the second half of 2008 by 0.3 percent while the Czech crown weakened against the euro by 11.8 percent, the Polish zloty by 22.5 percent and the Hungarian forint by 11.8 percent, said Lenko.

Lenko expects local currencies to continue to be exposed to similar pressures this year too.

“Slovakia, because of its adoption of the euro, will not be threatened,” Lenko said. “Of course, we can’t say that the euro will fully neutralise the negative impacts of the crisis on the Slovak economy, but it might ease these impacts by removing the foreign-exchange related costs.”

Poštová Banka analyst Zuzana Holeščáková agrees that one of the positives of the euro is that at a time of crisis it is not vulnerable to turbulence on the market to the same degree as other countries’ currencies.

However, it also moves the country to a more sensitive situation vis-a-vis weakening demand for goods and services within the eurozone, Holeščáková told The Slovak Spectator.

“Still, the euro is a stabilising and integrating element, which is particularly important from the point of view of foreign investors,” Holeščáková said.

By removing the exchange rate risks along with transaction and administrative costs, the euro adds some new advantages to Slovakia’s geographical location and low costs, Holeščáková said.

“A significant part of Slovakia’s exports, at about half of them, go to eurozone countries,” Holeščáková said. “Thanks to the adoption of the euro, Slovakia now has more favourable conditions for the prompt resumption of foreign trade [growth].”

According to Holeščáková and Lenko, many export- and import-oriented Slovak firms will see their transaction and administrative costs fall.

Mária Valachyová, a senior analyst with Slovenská Sporiteľňa, the country’s largest bank, shares the view that adoption of the euro should help Slovakia in terms of foreign investment inflow.

“Investors might see the euro as a competitive advantage when making decisions about where to place their investments,” Valachyová told The Slovak Spectator.

In future, the euro could particularly benefit the exporting sector, including the automotive, electro-technical and machine industries, since the crown had been gaining strength in the long term, Valachyová added.

However, Valachyová also suggested that it could be too early to make assumptions regarding the blessings that the euro might bring to the country’s economy.

“Currently, local currencies have been weakening towards the euro, which might be an advantage for their exporters,” Valachyová said. “Moreover, the Slovak crown was fixed at quite a strong level, so at this point I think it is too early to say whether the adoption of the euro has or hasn’t helped us during a time of economic crisis.”

By removing the exchange rate risks between the euro and the Slovak crown, the opportunity for gains from foreign-exchange operations, at least between these two currencies, has also been eliminated, Holeščáková concluded.

As for the impact that entry to the eurozone might have on Slovak banks, Holeščáková said that these are not yet suffering from a lack of liquidity. So Slovakia’s entry to the eurozone means for its existing members the arrival of a country with enough money and liquidity, she said.

“While prior to our entry to the eurozone, the NBS announced regular two-week sterilization repo tenders, where the banks were able to deposit their free cash at its key interest rate, the European Central Bank regularly announced refinancing repo tenders, where the banks can borrow money at its key interest rate,” Holeščáková told The Slovak Spectator. “Since Slovak banks do not have problem with liquidity, it is very possible that they will not regularly participate in the announced refinancing repo tenders.”

But if the need emerges, these repo tenders still might represent an interesting source of money for the banks, she added.

The most watched pair

The most closely observed pair of currencies is certainly the euro and US dollar, market watchers agree.

In the past six months overall, the euro weakened against the US dollar. But during the last month of 2008 it strengthened against the dollar by about 10 percent, Holeščáková told The Slovak Spectator.

According to Holeščáková, a further weakening of the euro towards the USD in the upcoming period might be linked to the change in US president and related plans to revive the US economy.

A weakening euro might also be linked to the further possibility of lower European interest rates, which would be most likely to take place during the first months of 2009 in order to provide banks with enough accessible finance and assist in the effort to renew trust among banks, Holeščáková said.

Holeščáková also noted that the British pound is reaching historic lows, which is now close to one euro to one pound.

“It is not out of the question that the pound weakens to the level of the euro, since the impact of the global financial crisis on the British economy is very strong,” Holeščáková said.

According to Lenko, to assess the development of the main currency pairs is even more difficult than it was in the past.

“The reason is of course the high degree of uncertainty over the development of the world economy and the steps that the central banks will take, as well as the effectiveness of fiscal stimuli which are intended to revive the economic growth,” Lenko said.

His fellow-analysts from Intesa Sanpaolo, VÚB’s parent bank, suggest that the US dollar might trade at $1.35 to the euro within one month; then at $1.28 after three months.

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