By Jan Lopatka
PRAGUE, Feb 23 (Reuters) - The sharp drop in the Czech crown
and other central European currencies is overdone and central
banks from the region have agreed coordinated comments on the
issue, Czech central bank Governor Zdenek Tuma said on Monday.
The weakening of the Czech crown may also reverse the
country's interest rate cycle, he told Reuters.
Tuma said central banks in Poland and Hungary shared the
view that moves in the region's currencies were out of line with
fundamentals and that markets should differentiate between the
situation of individual countries, and they had agreed to issue
coordinated comments on the matter.
His comments were released at the same time that the central
banks of Romania and Hungary planned to start news conferences,
which Bucharest said would be on central and eastern European
foreign exchange markets.
"It is a fact that coordination at present is more intensive
than at other times and that we share the opinion that the
currency swing in a number of countries does not correspond to
the real economic situation," Tuma said in an interview.
"We agreed in this respect that we will comment on the
development in a similar way and of course we will further
continue in a more intensive communication than usually."
Currencies across central and eastern Europe have slumped
due to growing concerns that at least some of them would require
foreign aid, mainly because of exposure to foreign debt and its
impact on the banking sector.
Tuma said the crown's drop to as low as 29.69 to the euro
<EURCZK=> last week, well below the 25.80 to the euro average
2009 rate foreseen in the bank's forecast, was only partially
explained by the drop in exports which the economy has suffered
since the currency shot up to all-time highs at 22.925 last
July.
"I believe the crown is overshooting in the other direction
now," Tuma said.
"Of course the drop in exports is something that must have
an impact but I would not say there is some destruction of
capacity or potential of this economy and I do not believe this
strong weakening can be explained by fundamentals," he said.
The bank has slashed interest rates by 200 basis points to
1.75 percent since last August as the export-driven economy
slowed sharply amid a collapse in demand in western Europe, but
Tuma said the currency fall was changing the picture.
"At the moment I can hardly imagine that at these exchange
rate levels we could lower interest rates further; it is rather
a question when we start going in the other direction," Tuma
said.
Asked about the possibility of foreign exchange market
intervention, Tuma gave the bank's standard line that he would
not exclude any tool the bank could use in an extreme situation.
DIFFERENTIATE
Tuma said markets should make a clear distinction between
countries such as Latvia that were in bigger trouble than others
in the region, and an international debate on aid for central
and eastern Europe could help to make those distinctions clear.
He said the Czech government could finance itself without
problems on the domestic market where banks had funds.
The Czech economy had little exposure to foreign currency
debt and needed no aid, nor did the banking sector.
"No one can avoid the crisis but some countries are
certainly better situated for going through it without any
dramatic losses, and I am convinced that the Czech Republic
belongs among them," Tuma said.
"So far I cannot imagine, I do not know any scenario leading
to us needing some aid," he said.
He said the fact the Czech Republic entered the crisis at
the peak of the economic cycle and with a low budget deficit
were further supporting factors.
"Even (in) the worst case scenarios we try to simulate the
outcome is that the banking sector should be able to stand it
from the capital point of view; it should not get into negative
capital, so we do not see even the potential need of any
significant injections from the state (or parent banks)."
