Poland led a selloff in emerging Europe, with the zloty sliding the most since 2011, as the U.K. vote to quit the European Union threatened to throttle aid to the bloc’s less-affluent eastern member states and curtail trade with Britain.
The zloty, regarded as a proxy for emerging-market risk to the so-called Brexit, slid as much as 3.8 percent against the euro as the victory for the U.K. leave vote pounded stocks in Warsaw, Budapest and Bucharest and sent Polish bond yields soaring the most in three years. The cost to insure Poland’s debt against default rose to the highest since 2012. Central banks from Romania to Hungary moved to calm markets.
A British departure increases the likelihood that emerging EU member states will suffer from scaled back financial support from the EU that they rely on to build roads and other infrastructure. The U.K. made the third-biggest contribution to the bloc’s budget in 2014 and is a major destination of exports from nations to the east, which also receive remittance flows from citizens living in Britain.
“Everyone is in shock,” said Simon Quijano-Evans, the chief emerging-market strategist at Commerzbank AG in London, which downgraded bonds from Poland, Hungary and Croatia in April on Brexit risks. “Central and eastern Europe has by far the most to lose in all this, given they are the clear net beneficiaries of EU membership, while the rest of EM has to start thinking about the secondary effects on global growth.” Quijano-Evans said he’s reassessing his market calls.
Biggest Losers
The National Bank of Hungary, which is taking part in a meeting with the government and debt agency today to discuss Brexit, has tools “to continuously secure financial stability,” according to Managing Director Daniel Palotai. Romania’s central bank said it was ready to step in to calm market volatility, while its counterpart in Slovenia downplayed the potential fallout for the country.
The zloty trimmed losses to 2 percent against the euro to 4.4572 by 10:01 a.m. in Warsaw, bringing losses this year to 4.3 percent. Poland’s five-year credit-default swaps rose 18 basis points to 101. Hungary’s forint retreated 1.3 percent to 318.30 per euro, while Romania’s currency lost 0.5 percent in a broader selloff that dragged the MSCI Emerging Markets Currency Index down 1.6 percent.
“We should expect fairly large intervention, verbal and real, to shore up market confidence,” said John Hardy, the Hellerup, Denmark-based head of foreign-exchange strategy at Saxo Bank A/S.
Haven Status?
In the run-up to the referendum, assets in emerging Europe were bolstered by speculation Britons would vote in favor of staying in the bloc they’ve been part of for more than four decades. In the end, the U.K. backed “Leave” by 52 percent to 48 percent.
The U.K. departure marks a further blow to Poland’s status as a haven in emerging markets. Investor sentiment toward the country has soured since a new government elected late last year took steps to undermine the authority of key institutions, prompting Standard & Poor’s to cut Poland’s credit rating in January.
The yield on 10-year Polish debt climbed 25 basis points to 3.26 percent, the most since June 2013. Stocks in Poland and Prague slumped more than 4.7 percent, while shares in Hungary and Romania tumbled 2.7 percent. As its borrowing costs climbed, Poland’s finance ministry announced it was canceling an auction scheduled for next week and may limit bond supply in the near-term.
Swiss Mortgages
With its $545 billion economy and 38 million people, Poland is scheduled to receive 114.7 billion euros ($127 billion) of funds between 2014 and 2020, the most of all states in the EU. Poland received about 4 billion euros in remittances annually from compatriots living in other EU countries, mostly in the U.K., according to central bank estimates last year.
While countries like Romania and Bulgaria get smaller allocations from the EU budget, they’re also more exposed than larger countries like Poland since their citizens have lower incomes.