Bloomberg News

Fixing Zloty to Euro May Cause “Turmoil,” Belka Says

November 23, 2011

(Corrects currency in sixth paragraph.)

Nov. 23 (Bloomberg) -- Fixing the Polish zloty to the euro in the European Union’s Exchange Rate Mechanism now would cause “turmoil” and makes “no sense,” central bank Governor Marek Belka said.

Joining the mechanism would encourage speculation against the zloty, which would be locked into a trading band to the euro, Belka said in an interview published today on the central bank’s website.

“Taking the zloty into the trading corridor today would be a recipe for turmoil on the currency market,” Belka said. “Investors would want to test whether we can keep the zloty within the corridor.”

Poland is obliged by the terms of its 2004 EU accession to adopt the euro when it meets conditions including curbing inflation, cutting the budget deficit to within 3 percent of gross domestic product and pegging the zloty to the bloc’s common currency for a minimum of two years. It must also change its constitution to shift monetary policy supervision to the European Central Bank, which would require opposition support.

The zloty has lost 11 percent against the euro since June 30, the sixth-worst performer among more than 170 currencies tracked by Bloomberg. Five-year credit-default swaps, which hedge against non-payment, traded at 312.6 basis points today, the highest since Oct. 4.

Zloty Support

Belka said above-target inflation is a concern and “one of the main reasons we’ve intervened on the currency market” three times since Sept. 23. The central bank sold euros again today at about 9:39 a.m., marking the fourth time it has sold foreign currencies to support the zloty.

Poland’s inflation rate was 4.3 percent in October, the 13th straight month that annual price growth has topped the central bank’s 2.5 percent target.

Poland can’t achieve its political goals in the EU without joining the euro area, Belka said. Nevertheless, Prime Minister Donald Tusk would have been criticized had he announced a deadline for adoption at a time when a split in the currency area can’t be ruled out, he added.

The 17-member euro bloc’s inability to contain a debt crisis that started in Greece more than two years ago has led to a surge in Italian and Spanish bond yields, while the euro has slumped 7.7 percent against the dollar in the second half of this year. Crisis-management efforts by the region’s leaders have done little to stem the turbulence as Italy struggles to persuade investors it can stay afloat without a bailout.

Deficit, Debt Plan

Fiscal-consolidation plans outlined by Prime Minister Donald Tusk last week in his first policy speech since winning re-election were positive, Belka said. Tusk said the government would narrow the budget deficit to about 3 percent of GDP next year and 1 percent in 2015, by which time it will cut public debt to 47 percent of GDP.

One of the government’s most important deficit-trimming measures is a plan to raise disability contributions for employers by 2 percentage points, since few other proposals target short-term budget savings, Belka said. Still, Poland must wait for rating companies to upgrade the country’s debt rating.

“If the government’s budget pledges are realized, I would expect an improvement in the ratings,” he said. “But execution comes first.”

Standard & Poor’s and Fitch Ratings said after Tusk’s Nov. 18 speech that they need further details to assess the effect of the proposals, while Moody’s Investors Service said it saw “no immediate effect” on Poland’s rating.

Belka said he “wouldn’t rule out” interest-rate cuts next year as “more disciplined budget policy would open the way for monetary easing at some point.”

The central bank left the benchmark seven-day interest rate unchanged at 4.5 percent for a fifth month in November after increasing borrowing costs four times between January and June by a total of 1 percentage point to combat inflation, which soared to a decade-high of 5 percent in May and has been hovering around 4 percent since.

--Editors: Andrew Langley, Balazs Penz

To contact the reporters on this story: Katya Andrusz in Warsaw at; David McQuaid in Warsaw at

To contact the editor responsible for this story: Balazs Penz at

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