Brexit crushes currencies and whips up populism in Central Europe

Brexit crushes currencies and whips up populism in Central Europe
The zloty weakened against the euro, the US dollar, and the Swiss franc, while stocks on the Warsaw Stock Exchange fell sharply.
By bne IntelliNews June 24, 2016

With the zloty in free fall and the Warsaw Stock Exchange plummeting in the wake of the Brexit result, Poland has cancelled a debt auction planned for June 27. It will hope, like the rest of the four Visegrad Group nations, that the fallout from the initial shock will soon start to ease.

Financial markets went into turmoil on the morning of June 24, as it was announced that a majority of Britons voted in favour of the UK leaving the European Union. The zloty weakened against the euro, the US dollar, and the Swiss franc, while stocks on the Warsaw Stock Exchange fell sharply, in line with predictions Brexit would hit emerging markets particularly strongly.

At the swap auction scheduled for June 27, Warsaw had planned to offer papers for three series of bonds maturing in July, August, and October 2016. The finance ministry noted, however, that it has already covered around 70% of Poland’s debt needs, which, in addition to PLN60bn (€13.5bn) of liquid reserves, allows it to limit debt supply for the meantime.

However, though several Visegrad leaders will seek to take advantage of the Brexit vote to push their own eurosceptic agendas, they will also be keen to see a swift end to the “increased market volatility” cited by the finance ministry in Warsaw.

Populist surge

The vote for Brexit will only encourage the populist tendencies in the Visegrad region.

The Polish government reacted to Brexit by calling for reform of the EU. “Rather than drawing criticism, the voice of the British people should send a warning signal and mobilize us to take further action," Foreign Minister Witold Waszczykowski said in a statement. "The disillusionment with European integration and declining trust in the EU can be observed in some member states and is something we must counteract by bringing the Union closer to the citizens."

“It is imperative that we reform the EU by cutting red tape, increasing the democratic legitimacy of its decisions, and better adapting it to new challenges,“ Waszczykowski added.

However, his ministry was keen to note one of its biggest concerns. With close to 1mn Poles working in the UK and sending remittances back home, Warsaw is keen to limit the impact of Brexit in these areas.

"We are open when it comes to the scope and nature of an agreement regulating the relationship between Great Britain and the EU in the future, whilst also underlining that such a deal should be pragmatic  and beneficial to all sides," its statement continues. "We want to assure the EU citizens, including Poles who live and work in Great Britain that during the talks with the British partners ... we will aim for a solution that guarantees the rights such EU citizens have acquired."

Hungary's populist Prime Minister Viktor Orban was also quick to leap on the bandwagon to use Brexit to push his own agenda. “In the debate about UK membership, the question of immigration was decisive,"  the populist, who has led a bitter battle against Brussels attempts to set mandatory migrant quotas, said in his regular interview on Kossuth Radio. "The biggest thing to learn from UK’s decision is that Brussels needs to listen to people’s voice.”

A staunch critic of international markets over the years, the Hungarian leader also evidently enjoyed the panic, despite the impact on the forint. “The market is living in the present, politics is living in the future. This is why investors might be surprised now,” he added.

Czech Prime Minister Bohuslav Sobotka, who has sought to play the part of the good cop in contrast to the populists governing the rest of Visegrad, insisted that while the EU must adapt, Brexit does not mean the end of the EU, according to Reuters.

"The European Union must change quickly," he said on his Facebook page. "Not because Britain has left, but because the European project needs much stronger support of its citizens. Europe must be more ready to act, be flexible, less bureaucratic and much more sensible to the diversity that the 27 member states represent."

Currency crunch

The zloty was one of the hardest hit currencies amongst emerging markets on the morning of June 24, as investors - previously betting on Bremain - scrambled for cover. As the shock subsides in the coming days, many emerging market currencies are likely to stabilize. Indeed, the likelihood that central banks to the West will react with eased policy stances could even offer some EM assets added impetus.

However, the Central & Eastern European EU member states are likely to continue to suffer, due partly to their exposure, albeit limited, to real economic threats – read EU funds and remittances – as well as the tremors in sentiment and the liquidity of their markets. Poland, as the bell-weather for the region and a proxy for overall CEE risk, suffered most, and that is likely to continue, suggest analysts.

However, there will no doubt be action in Visegrad to try to defend against the pressure. "As the dust settles … we must expect policy responses, from local central banks," points out Commerzbank, "[The National Bank of Poland] has openly warned speculators that it is standing by to curb excessive [zloty] weakness in a Brexit aftermath."

Hungary's forint and the Romanian leu are also expected to struggle. Both countries are amongst the biggest per capita beneficiaries of EU funding. "We see EUR-PLN and EUR-HUF rising possibly to 4.60 and 325.00 respectively before [the Polish and Hungarian central banks] take counter measures to break the spirals," writes Commerzbank.

Meanwhile, Brexit could even test the Czech koruna's role as a haven, suggest some. The currency has been caught up in the immediate indiscriminate Brexit correction, but there is disagreement where it goes from here. Many expect the crown to continue to test the central bank's cap, as investors increase risk adversity.

However, others suggest Brexit could knock its haven credentials. "The Czech market may feel some pressure going forward," RBI suggests. The Austrian bank suspects "speculative strategic positons on CZK appreciation could be closed in a context of overall market uncertainty".