(Adds PM comments, market reaction)
By Peter Laca
BRATISLAVA, May 29 (Reuters) - Slovaks awoke to a more
prosperous outlook on Thursday after a surprise 15 percent
revaluation of the crown's peg against the euro which should
help contain inflation pressures ahead of planned 2009 euro zone
entry.
The country of 5.4 million boosted the crown's central
parity in the ERM-2 exchange rate mechanism, the waiting room
for euro adoption, after U.S. market hours on Wednesday to
30.1260 per euro, the second revaluation in two years.
The move sent the crown up 0.8 percent to a fresh all-time
high, cementing its 25 percent gains since Slovakia's 2004 EU
entry and boosting the currencies of other ex-communist
newcomers to the bloc.
Analysts said the revaluation was a sign the likes of
Poland, Hungary and the Czech Republic may be encouraged to let
their currencies climb before adopting the euro to fight
inflation and raise income levels closer to those in the West.
The market took the new parity rate as the likely final
euro-crown conversion rate, to be set in July, although Prime
Minister Robert Fico threw that in doubt.
"It is not appropriate for me to speculate about the
conversion rate, which has nothing to do with the parity," news
agency TASR quoted Fico as saying.
SURPRISE MOVE
The market had expected the adjustment, but it was caught
off guard by its early timing and the size -- 17.6472 percent in
international terms -- which allowed the crown to jump past its
historical record high trading levels.
Fico has repeatedly said that a strong conversion rate with
the euro was a good way to help Slovaks, who will be the euro
zone's poorest member with around 71 percent of average GDP per
capita, close the wealth gap.
The revaluation also had strong backing from the EU
executive and the European Central Bank, who have expressed
concern that the central European country will see a spike in
inflation after swapping the crown for the single currency.
The ECB praised the decision on Thursday, saying it was
"aimed in particular at maintaining price stability in a
sustainable manner, underpinning external competitiveness and
strengthening economic resilience".
Slovakia, a laggard under former autocratic leader Vladimir
Meciar and the region's poorest country a decade ago, has leapt
ahead of neighbours Poland, Hungary and the Czech Republic in
the race to catch up with the rest of the EU. It led the region
last year with growth of 10.4 percent.
The crown's strength has helped keep a lid on inflation,
although many analysts believe price growth -- which hit 3.7
percent by EU methodology in April -- could surpass the average
euro zone rate for a decade or more after euro adoption.
Furthermore, a recent poll showed almost three quarters of
Slovaks fear euro adoption will cause a spike in prices, making
them effectively poorer, as happened in Slovenia where inflation
hit 6.2 percent in April after it took on the euro in 2007.
LAST REVALUATION
The crown briefly touched 30.080 per euro but then retreated
and was at 30.285 per euro at 1145 GMT.
The unit has firmed 5.4 percent since May 7, when the
European Commission said Slovakia was ready to join the zone.
But, since EU entry, it has trailed the Polish zloty, which
has jumped 29 percent, while the Czech crown has risen 24 and
the Hungarian forint 4 percent against the euro.
As new EU members, those countries are also obliged to adopt
the euro, but analysts say their struggles with inflation,
budget deficits, and weak political will mean none of them may
join for at least four or five years.
The new central rate was set exactly at the previous strong
limit of the ERM-2's plus/minus 15 percent fluctuation band. The
Slovak central bank said the new limits for the ERM-2 band are
25.6071 crowns per euro and 34.6449 crowns per euro.
Unicredit emerging markets strategist Martin Blum said there
was little chance for the crown to move significantly again
ahead of the final fixing of the conversion rate, expected in
the first week of July.
He said he expected clients to begin closing positions in
the currency, and the once small but popular currency market --
which has attracted investors alongside the Czech, Polish and
Hungarian currencies -- would begin to wind down.
"We think this is the final revaluation and we recommend
taking profit at more or less these levels," he said.
"Effectively, this is it. Everyone can pack up."
(Additional reporting by Martin Santa; Writing by Michael
Winfrey; Editing by Gerrard Raven)
