Poland’s finance ministry intervened on the currency market for a second day, buying Polish zloty’s in order to stabilise the country’s foreign exchange rate and keep its foreign debt at bay, avoiding the necessity of introducing painful austerity measures.
The foreign debt, making up for around one third of Poland’s total public debt, is priced based on the Polish zloty’s last fixing each year, and in order to strengthen the currency just ahead of that time the ministry’s agent, BGK bank, was heavily buying zlotys.
“We saw significant supply of the zloty from London, but then BGK started buying heavily,” a dealer said.
As a result, the zloty was on a rollercoaster ride Friday as state-owned bank BGK soaked up zloty supply from foreign investors. But once the bank’s support ceased, the zloty quickly weakened even further, hitting the session’s high of PLN4.47.
The ministry later Friday announced that public debt for 2011 will be slightly below 54% of gross domestic product, not far off its 53.7% forecast, and reiterated its targets for the next year.
The ministry added it has some PLN30 billion in cash, mostly foreign currencies at its disposal.
Poland’s government wants to keep total debt under 55% of gross domestic product, a level that would trigger painful austerity measures, including tax increases and quickly limiting government spending to tighten public finance.
Economists earlier estimated that the zloty would have to weaken to around PLN4.7 against the single currency in order to threaten the 55%-of-GDP debt threshold.
The finance ministry, wary that using the fixing makes it prone to market participants’ speculation as they position themselves to profit from expected intervention, wants to change the way public debt is valued in the future by using an average euro/zloty rate instead.
Late in the session, the central bank was also spotted on the market, dealers said, sending a signal that even in the new year it will be ready to step in to defend the zloty from too rapid moves.
BGK’s and the central bank’s intervention Friday followed coordinated action with the central bank Thursday, when both institutions also stepped into the market to defend the Polish zloty’s foreign exchange rate from weakening further.