Interventions saved the zloty from more severe losses

Headlines: 
 -  Interventions saved the zloty from more severe losses 
 - EUR/HUF back above 280 as PM should unveil new program for FX borrowers

A spike in risk aversion together with speculations above Hungary’s new plan to assist foreign currency borrowers put the zloty and forint under heavy selling pressure. This was eased only by the Polish forex intervention, which was delivered by the state BGK bank, which disposes of euros coming from EU funds. Clearly, the intervention helped to curb zloty’s weakening as it came at the EUR/PLN 4.35 level on Friday, while the pair trades currently at the 4.3 level. It is worth noting that the situation on the Polish markets calmed thanks to reassuring words from NBP Govrenor Belka. Still, we think that the effect of forex interventions is critical and we believe more to come, if the EUR/PLN retests the 4.35 level.

Regarding the forint, the currency is currently threatened by a new plan of Hungarian PM Orban, who would like to help distressed FX borrowers further. PM should outline its new plan today, but it was already announced by the ruling Fidesz faction on Friday. The plan will propose to fix the exchange rate on early repayments of foreign currency based loans. For CHF/HUF loans the proposed rate is 180, some 20% below the current rate of 230 and for EUR/HUF loans at 250, some 11% below the current market rate of 281. The proposal would generate a major loss for banks, if 1/3rd of the outstanding Sfr24.8bn foregin currency debt is paid back, banks would suffer about Ft400bn loss of 1.4% of GDP. This loss is equal to 17% of the banks' capital and thus would require capital injection at some of the banks to meet the legal requirement. We think the idea will be discussed with banks and could be modified before approval. In the Parliament, the Fidesz faction has 2/3 majority and one of the three opposition parties said that they may accept to put it on the Parliament's table. Socialists and liberal LMP said that they are against. We think the proposal could be modified before accepted and banks will lobby hard to at least increase the exchange rate closer to market rates, but still it may take a heavy toll on their balance sheets.