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Poland – do (central) banks ever learn?

Wednesday, June 15th, 2016

Trying to lower costs for interest rate payments is a natural human ambition. But nothing is free of charge. Risks may be increasing when potential gains seem to be achievable. In credit terms this is often about exchange rate risks for borrowing in foreign currencies. (This problem is, by the way, usually part of my classes in the first semester).

These considerations on credit conditions may happen by applying three alternatives: comparing nominal interest rates between two countries, expectations of a stronger own currency or both of these two alternatives as a simultaneous mix. However, the mostly existing exchange rate risks make things particularly difficult and speculative; the calculations have to be based on a forecast – and everybody should know that currency forecasts in principle are impossible. In other words: a lot of luck is needed if a credit in foreign currency really turns out to be profitable. In my view, taking such a risk is neither prudent nor smart.

But these speculations happen again and again – despite all the negative stories about it. In Sweden, we have some bad experience from the times of devaluations around 35-40 years ago when greed or limited intellectual capacity led to massive loans in Swiss francs to Swedish farmers; later on, accidents happened with lending in yen for pure domestic Swedish purposes. The same kind of mistake was also committed before the eruption of the so-called Asian crisis in the late 1990s, with several countries in mainly South East Asia being heavily involved. And the story behind the financial crisis in the Baltic countries more recently was not very different either.

Unfortunately, Poland also went into this trap – an accident I did not expect ten years ago after having met so many well-educated and well-understanding leaders at this country’s central bank from as soon as the early 1990s. From around 2006 onward, however, too many new Polish mortgage loans were granted in Swiss francs, combined with strong expectations of an ever strengthening zloty. In 2008, finally, this development was reversed. The zloty weakened on trend. The central bank and the banks should have reacted before that. The zloty moved at last on a long-lasting downward trend. Thus, previous expectations of very favorable credit conditions were not met anymore.

Consequently, many mortgage credits in foreign currency have become very expensive in the past few years. For this reason, the Polish government now tries to launch a package for converting these burdening credits in foreign currency into stable zloty loans. However, his transmission will not be easy – and very costly, too.

The question remains: Will banks – and even central banks – ever learn?

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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Argentina – better this time?

Wednesday, May 18th, 2016

This time, I change the content of my blog and turn to South America. Argentina is currently trying to reorganize and restructure its economy – not one single day too early. Now again, long-term observers of the Argentine economy may add.

The Kirchners certainly failed as presidents (2003-2015). Argentina’s relatively new president and former mayor of Buenos Aires – Mauricio Macri – is now trying to restore international confidence in his country by a much more market-oriented policy than the Kirchners were conducting. Some success can already be seen, for example by bringing back Argentina to international capital markets – though at a high interest rate and after an international compromise about the old government debt and the return to a floating currency system against the U.S.dollar (which led to a significant but unavoidable weakening of the peso).

Despite these and some other positive signals, the outlook for Argentina remains very uncertain. The country is still in a recession. Risks for social unrest are still in place.The budget deficit is high, and so is inflation after the abolition of important price regulations and the weaker exchange rate. Trying to give a better balance to the economy remains difficult.

In other words: l am not sufficiently convinced that Argentina will achieve sustainable progresss in its fight against the burdening economic hangover after the Kirchner era. My own analytical experience from Argentina and its economy makes me doubtful.

At least we can now see the start of a better economic policy for the fascinating country of Argentina. Let’s hope for the best ! But Macri and his team are still very far from the goal.

In the meanwhile, we can always watch all these wonderful fotboll players from the country of the pampas. They use to give us fun also during difficult times in Argentina’ economy. By the way, President Macri once was the head of Boca Juniors, the creator of many superstars of Argentine fotboll (soccer). Now he is the president of Argentina.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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TTIP should be discussed more (in Sweden)

Tuesday, May 10th, 2016

The ongoing free trade negotiations between the United States and the EU (TTIP) are currently entering a decisive period. Totally, 24 chapters have to be settled. However, communication from this important event is held at a low level in Sweden, despite the fact that the responsible EU Commissioner for TTIP – Cecilia Malmström – comes from Sweden. At the same time, the Swedish government obviously avoids to discuss the issue more extensively with a broader public – for whatever reason. This should be changed for democratic reasons!

Time is tight for coming to an agreement between the U.S. and the E.U. It should happen before president Obama will be leaving his office on January 20. Quite a number of difficult issues have to be agreed upon until this date.

Here can be noted institutional matters such as investors’ protection, public purchasing (“buy American”) and sensitive parts of agriculture. Particularly certain details of the agricultural negotiations may become complicated because of the difficult balancing act between necessary environmental protection and too generalizing populism.

The question whether TTIP will become a hot topic or not in Sweden and a number of other involved countries cannot be answered today. But we do know that TTIP is important and already today discussed with passion in, for example, Germany, France, Austria and the Netherlands.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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