Tuesday, February 24, 2009

How Not To Practise The Ancient Art Of Verbal Intervention

Let's flash back quickly to yesterday (Monday). The big news of the day (at least as far as Central and Eastern Europe went) was that East European central banks had reached an agreement to try to bolster their currencies via their first coordinated action since the spread of the global financial crisis.

Czech, Polish, Hungarian and Romanian central bankers all agreed to speak publicly about the effects of the exchange-rate swings, according to Romania’s central bank Governor Mugur Isarescu at a news conference in Bucharest. His counterparts in Prague, Budapest and Warsaw issued similar statements during the afternoon. The four currencies all gained significantly on the day. The Hungarian central bank even kept interest rates on hold to boost the currency, even though this will lead to an even sharper economic contraction and even higher unemployment. But how long did it last?

Well, now fast forward to today, and a press conference in Brussels, attended by EU Commission President José Manuel Barroso and Hungarian Prime Minister Ferenc Gyurcsany. The message was meant to be that the Hungarian government was on the right path, and was going to receive full backing from the European Union. And how did our good prime minister "talk up" the currency?

"We're in serious trouble indeed," the Hungarian prime minister said.

And how did the forint react?

The sell-off on the forint market was almost immediate, and the Hungarian currency abruptly and sharply fell to over 303 to the euro from its earlier and hard won level of 297.

True all the talk about Latvian downgrades (see previous post) and East European weakness didn't help, and the kind of verbal strategy decided on yesterday was always a sign of strength rather than a sign of weakness. As Danske Bank said in a report yesterday:

The markets might try to test whether this is just verbal intervention or whether the CEE central banks would be willing, for example, to hike rates to defend their currencies. The markets will be watching over the next days for more direct intervention in the CEE FX in the form of coordinated intervention and/or rate hikes. However, if they see that the talk is not being backed up by action, the depreciation of the region’s currencies could resume.

Still, you might have thought the policy would have lasted a little longer than 24 hours, and that the Hungarian people would have been a bit better served by their leaders.

No comments: