Jan Cienski in Warsaw -

Talks on restructuring Greek debt or Hungary's less abrasive relations with the International Monetary Fund would seem to have little to do with Poland, but a key part of the zloty's rebound this year has been due to a lessening of worries about the direction of the international economy.

The Polish currency had been hammered in the last months of 2011 by rising risk aversion, as investors fled emerging markets fearing a return to the economic conditions of 2009. Despite pleas from Polish officials like Finance Minister Jacek Rostowski and central bank governor Marek Belka that markets were disregarding the strong economic fundamentals of the Polish economy, investors dumped the zloty, causing the euro to rise by 14% against the zloty and the dollar to shoot up by 27% over the last five months of the year.

One reason was that the Polish currency market is the region's largest and most liquid and many investment funds, especially those from the US, treat the zloty as a proxy for the region. That means if they worry about the overall direction of Central Europe - caused, say, by a collapse in talks between Hungary and the IMF - the zloty tended to suffer. "Given its comparatively good growth dynamics, and the determined fiscally tighter stance of the Polish government post the elections in October, the zloty has been hit surprisingly and perhaps disproportionately hard by the ongoing European crisis," wrote analysts with Danske Bank.

The zloty's weakness had a mix of economic consequences for Poland. On the plus side, it helped exporters, who were able to gain market share in Western Europe. But overall the impact was negative, even for companies selling to Germany. "The low zloty helps us a bit, but the extreme volatility is much more of a problem for us," says Zbigniew Lindner, owner of an eponymous Polish company that sells coffins in Germany.

The zloty's weakness also hit the 700,000 Poles who were imprudent enough to take out mortgages denominated in foreign currencies - mostly Swiss francs - during the real estate boom which ended in 2008. By December, the franc had risen by 90% against the zloty compared to the exchange rate in the summer of 2008.

At a recent meeting with several financial industry executives, the talk turned to who had a Swiss franc mortgage - it turned out everyone did. "My wife thinks that maybe I'm not cut out for this business," laughed an investment fund manager. "It's true that my payments are higher, but I'm still getting by."

For thousands of borrowers that means much higher payments, while the banks holding the mortgages have had to beef up their reserves, setting off a deposit war as they drew in more liquidity.

The lower zloty also triggered higher inflation, hitting an annual 4.6% in December, far above the central bank's upper limit of 2.5%.

However, as nerves have calmed in recent weeks, the zloty has regained strength, rising by 10% against the dollar and by 7% against the euro.

The currency has been helped both by a more benign external environment - Hungary is no longer at loggerheads with the IMF, growth may not be quite as low as feared in northern Europe, and the euro crisis has temporarily calmed - and by internal factors.

The most important of those was the confirmation that Poland's economy grew by 4.3% in 2011, one of the highest rates in the EU, and looks set to grow by about 3.0% this year, again beating most other EU members.

January's Purchasing Manager's Index surprised strongly on the upside. Instead of the 49.2 points predicted by markets, which would have implied a slight slowdown, the number came in at 52.15, suggesting continued growth.

The central bank's hawkish tone has also helped. There is no suggestion of a cut in the 4.5% benchmark rate, and bank officials have made clear their worry about the zloty's weakness and suggest that rates may even be raised in the future. "Rate cuts are unlikely," Belka said following the bank's most recent decision to leave the benchmark rate unchanged, adding that if the first quarter is also optimistic, "it could be one of the factors nearing the Monetary Policy Council to tighten monetary policy."

The finance ministry has taken advantage of the improvement in sentiment by locking in almost a third of this year's borrowing needs in a series of well received bond auctions, reducing the risk that Poland could be hit with unexpectedly high borrowing costs if there is an adverse change in investor sentiment. The zloty's rally has taken it "closer to the levels we would consider fundamentally fair," notes Danske.

The zloty is now trading at 3.44 to the Swiss franc, a level last seen in July. The dollar is at 3.15 zlotys compared with 3.52 in early January, while the euro is at 4.17 zlotys compared with 4.56 in December.

Analysts feel that the rally will peter out with the zloty hitting about 4 to the euro - a rate that still leaves exporters able to compete but lessens the danger of inflation and a bank capital squeeze. Bankers, borrowers and ministers have to be hoping that the current calm continues.