The crown is losing ground. Those who can in business are switching to euros – List of News

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The Czech koruna is a boat that is tossing about in turbulent international seas, and its helmsmen do not have much control over it. It sails mainly according to the wind, which is currently blowing in a favorable direction – the Czech currency is the strongest in the last fifteen years.

Despite record-high inflation, the worst balance of payments since the beginning of the great crisis in 2008, record deficits of the state budget and economic recession.

However, one factor is surprisingly strong in this cocktail. Since the fall of last year, domestic companies have been taking a huge amount of loans in euros from banks instead of crown loans, for which – unlike crown loans – they do not pay such high interest. The savings are big: Instead of eight to nine percent interest, they pay four percent a year.

He transfers a large part of these loans worth hundreds of billions of crowns back to Czech crowns. These transactions significantly strengthen the exchange rate of the Czech crown. “These are both investment loans for financing the investment needs of companies, and operating loans that finance working capital and all the company’s operating needs,” says Petr Plocek, spokesman for UniCredit Bank, which is one of the four largest banks for companies.

“Part of these loans are converted back into Czech crowns. According to our estimates, it may be thirty to fifty percent of the loan in euros,” he adds.

Statistics confirm this. While companies had new loans in euros worth 566 billion crowns at the end of January, they only had 306 billion crowns deposited in bank accounts. “In recent months, the share of loans in euros has been increasing among companies, but this is not proportionally reflected in deposits, where companies still only hold a fifth of their deposits in euros. So companies take out loans in euros, but then convert them to crowns,” says Petr Sklenář, J&T Bank’s chief economist.

A massive increase can be seen at individual banks. For example, Komerční banka provided more than half of new loans in euros last year, and the share of euro loans in the bank’s total balance sheet was almost 41 percent. “We expect that the share of euro loans in the total volume of financing will continue to grow,” says Komerční banka spokeswoman Šárka Nevoralová.

The great interest in the euro on the part of domestic companies is also confirmed by currency traders. “We can confirm an increase in interest in converting euros from loans into crowns. It certainly plays a role in strengthening the koruna,” says Viktor Valent, director of dealing at the largest non-bank domestic currency trader, SAB Finance.

The exchange rate of the koruna has become the main tool of the fight against inflation for the new banking council of Governor Aleš Michl. The interest rate is set at seven percent, i.e. deep in the negative zone, if we take into account the expected inflation for this year, which according to the forecast of the Czech National Bank is 10.9 percent. In other words, it is still not worth saving in banks, because the return does not even cover inflation and money loses its value.

The course is considered essential by the governor himself, who is inspired by the first republic’s finance minister Alois Rašín. Rašín was obsessed with the strong exchange rate of the koruna, without paying much attention to the complaints of exporters, who lost competitiveness and profits due to the strengthening of the currency and went bankrupt in the early twenties.

The koruna has strengthened in recent months also due to the central bank’s commitment to intervene in the event of a significant weakening of the Czech currency against the euro. The Czech National Bank has one of the largest foreign exchange reserves in the world (130 billion euros), with which it is ready to buy Czech crowns in order to maintain a strong exchange rate.

The Czech Republic’s strong exports to the Eurozone, which is the main trading partner of most Czech companies from the automotive industry and other fields, also contribute to the strong exchange rate. Despite the crisis, Czech companies export more goods to Germany than they import. They then naturally convert part of the earned euros into crowns.

“The trade balance plunged into a record deficit last year, but this is not related to trade with the eurozone, but because of expensive energy purchased in dollars, the Czech Republic has a deficit with other countries. Exports to the eurozone, on the other hand, are growing, and consequently the mutual trade surplus with the eurozone is increasing to new record levels,” adds Sklenář.

If the strong koruna were to be maintained, we could also expect cheaper food, as companies often buy raw materials abroad. However, manufacturers will reduce prices only gradually.

However, the situation may soon turn against the crown. Euro financing is no longer as favorable as it was a few quarters ago, as the European Central Bank is set to raise its key rate to four percent. This reduces the attractiveness of the Czech crown, which has an effect on the yields of state and corporate bonds.

“Yields on high-quality Czech corporate bonds denominated in euros today exceed five percent, four-year Czech government bonds in euros bear three percent. Growing yields mean that the relative advantage of loans in euros compared to the Czech crown is decreasing. This phenomenon has reached its peak and the volume of euro loans will decrease in the future,” says Tomáš Pfeiler, portfolio manager of Cyrrus.

At the same time, some traders are already starting to speculate on the collapse of the koruna. “The strengthening of the koruna to the level of 23.35 last week is surprising. I’m betting on a drop in the koruna, especially against the dollar. Mainly because the CNB will defend the koruna against the euro,” says long-time forex trader Pavel Bodlák, who manages the assets of domestic businessmen in his company Carduus Asset Management.

However, the koruna will always be decided mainly by the sentiment of global investors, who perceive the Czech Republic as a microscopic country where, due to high interest rates, it was possible to make good money in the short term, but they will not hesitate to leave it at the first hint of other opportunities. So-called hot money has been flowing into the Czech Republic since the beginning of October last year, when the dollar began to weaken, or rather to correct the previous strengthening, and capital began to return to riskier parts of the world. Thus, not only the koruna strengthened, but also the Polish zloty and the Hungarian forint in the region.

An important turning point at the time was that energy prices, which have been falling rapidly for the past three months, were stabilized in Europe. So all the catastrophic scenarios that had a scare effect on European currencies, shares and bonds have disappeared.

However, inflation is by no means gone. According to the latest data, it is still high in Europe and the United States (not counting the Czech Republic). So the world’s central banks will have to keep tightening their monetary policy and raising interest rates to cool the economy. The optimism at the beginning of the year, when world financial markets experienced huge growth after last year’s slumps, may soon be interrupted.

It will mean only one thing for the Czech Republic: the sale of Czech state and corporate bonds in crowns and the weakening of the Czech currency. Koruna has no chance of sailing against the wind on the global ocean, although the crew led by helmsman Aleš Michl will do their best.