However, any comparison between the Czech currency and the Swiss Franc, does not hold. There is still a long way to go
The crises in the world markets show no signs of abating and, in the international arena, the most daring brokers and experts of macroeconomics are on the look out for new stars and safe havens, in a period of downgrades, interest rates, debt crisis and default. Industrial analysts, in particular, are keeping a close eye above all on those countries that have maintained a strong economic growth and are close to the Eurozone, but which have not yet adopted the euro. However, the answer to this series of indications is not Switzerland – the homeland of international finance and – up to now – the undisputed “tax haven” star but, on the contrary, it is the Czech Republic.
Despite the understandable scepticism that followed, there were a few factors that caught the attention of the international financial world, that were so concrete, as make the most optimistic individuals look at the Czech crown as the new Swiss Franc and, at the same time, evoke that Eurosceptic sentiment that is also so dear to President Vaclav Klaus. As a matter of fact, even the most disaffected individuals, cannot deny that Prague has a very low debt rate, a declining fiscal deficit and the lowest interest rates in Europe. It has a stable GDP and has almost completely recovered from the impact of the 2008 crisis, to such an extent, that the rating agency Standard and Poor’s – the recurrent nightmare of many advanced economies – has increased the country’s rating to “AA”, by listing it among the low risk states, such as Japan and the United States.
A recognition that has also taken into account the response of the crown to the turmoil of the market, compared to the consequences of the zloty in nearby Poland or the Hungarian Forint – that have respectively lost 4.9% and 3.3% against the Euro since July. The Czech currency has remained stable in the last few months and actually gained more than 2% against the single European currency. “The European debt crisis and the global economic slowdown might shift the attention of investors towards Czech bonds, because of interest rates and the stability of the local currency, making the country a safe haven among the emerging European states”, Unicredit had announced at the beginning of August. We must admit though, that the Czech Republic holds less exposed assets compared to other emerging Central and Eastern European countries, and even for the most optimistic individuals, the crown cannot be considered at the moment as a new Swiss Franc.
The journey is rather long and the Czech economy is well below Swiss standards. The difference between the crown and other currencies, that have greater liquidity, is enormous. In addition, the capitalization of the Prague Stock Exchange amounts to 71 billion dollars, compared to the 891 billion of the Swiss SMI blue-chip index, just to give an example. “Increased ratings, does not mean that China will sell all its Americans bonds to buy Czech ones,” said Jana Michalikova, executive director of the Czech Capital market Association. However, in the pro Column, one will have to indicate that the spread between the German and Czech bonds stands at 100 points, an interesting aspect, if compared to the fluctuations between the Bunds and the Italian Treasury bonds that have exceeded 400 points. “We expect that the trend – of considering the crown as a safe regional currency – will become stronger, especially when the markets overcome the present-day turmoil and the Bunds spread drops below 70 points,” Martin Lobotka pointed out, while commenting on the trend.
Whether one is sceptical or not, the fact remains that, especially for Czechs, the crown looks more and more alluring compared to the Euro. A widespread sentiment in this period of Euro-scepticism on the part of many countries that belong to the Eurozone, including the other countries that are slowing down the pace towards joining the Euro. Confirmation that the Czech Republic is not competing for entry into the European single currency club – having repeatedly postponed the date of its adoption – comes from Prime Minister Petr Necas, according to whom, preserving the national currency could become the turning point for maintaining the economic stability of the country. The head of government went on to say that the likelihood of joining the euro area is linked to the idea of a commitment to the “monetary union” not to that of “a debt union “. Among the Czech perplexities concerning the adoption of the euro, is also the possibility that the single currency might damage the Country’s leaning towards exports, thus reducing the added-value of industrial production, etc. on Czech territory. It is also this consequence, in fact, that lies behind the success of the crown: a strong currency, in fact, creates disadvantages for exporters (70% of Czech GDP comes from exports) and consequently, also consumers will see a drop in purchasing power, concerning foreign brand products. For that reason, economists are standing at the window, looking out to see if this trend of interest in the crown is going to remain temporary or become durable. A “bulletin” of preferences that could significantly change the economic and financial development prospects of the country.
By Daniela Mogavero