February 17, 2009
Hungary’s forint fell to an all-time low on Monday, and Poland’s zloty slumped to the lowest in five years on plunging industrial output. Half of all loans to the private sector in Poland are in foreign currencies so borrowers face a severe debt shock after the 40pc fall of the zloty against the euro since August.
“We’re nearing the level were things could get out of hand,” said Hans Redeker, currency chief strategist at BNP Paribas.
The mushrooming crisis has already started to spill over into Germany’s debt markets, lifting credit default swaps on German five-year bonds to a record 70 basis points. The gap between French and German CDS spreads has narrowed abruptly for the first time since the credit crisis began.
“Investors are beginning to ask whether Germany is going to have to pay for the rescue of Eastern and Central Europe,” he said.
A report by Moody’s released on Tuesday said the region’s banks were coming under severe stress as the property bust combines with a rising debt burden. “Local currency depreciation is a major risk to East Europe banks,” it said.
There are contagion worries for Western banks that have lent $1.74 trillion (£1.22bn) to the ex-Soviet bloc — split between $1 trillion in foreign loans and $700bn in local currency debt through subsidiaries.
Austria’s banks are the most exposed with the share of risk-weighted assets tied to the region reaching 54pc for Raffeisen and 38pc for Erste Bank. The exposure of Germany’s Bayern Bank is 48pc, Italy’s UniCredit is 45pc, and Swedbank is 29pc.