The European Central Bank has established or extended financing agreements with Poland and four other countries to support their efforts to defend their currencies against the fallout from Russia’s invasion of Ukraine.
The ECB said it had set up a €10bn precautionary swap line with the Polish central bank to provide it with euros in return for Polish zloty until January 2023 — the first time it has done this since the global financial crisis in 2008.
It also extended repurchase agreements to provide euro financing to the central banks of Hungary, Albania, North Macedonia and San Marino, which had been due to expire at the end of March.
Analysts said the move, which follows a sharp sell-off of central European currencies including the zloty in the wake of Russia’s invasion of Ukraine, would strengthen the Polish central bank’s ability to shore up the zloty if needed.
Piotr Bujak, chief economist at PKO Bank Polski, Poland’s biggest bank, said the establishment of the swap line with the ECB “is a lagged effect of the very significant pressure that we saw on currencies in the region in early March”.
“But of course it is possible that we will see further episodes of pressure on currencies in the region and in this context I think that it is a reasonable move,” he added. “I think it is a potentially useful instrument, even if it is not actually used. Even as a precautionary tool, it is supportive of the zloty.”
The financing deals will provide central banks outside the eurozone with access to euros that could back their foreign exchange interventions or be injected into the banking system in case their stock of foreign exchange runs low.
Central and eastern European countries have borne much of the brunt of the immediate fallout from the crisis in Ukraine, as 3.8mn refugees have fled the war-torn country, more than 2.3mn of them arriving in Poland.
The proximity of these countries to the conflict and their economic ties to Russia and Ukraine has caused concern among investors and put significant downward pressure on national currencies.
The depreciation of the Polish and Hungarian currencies have pushed up the price of imports, adding to upward pressure on inflation, which has risen to more than 8 per cent in both countries.
The Polish central bank has been spending euros in recent weeks to defend the zloty, which fell to its lowest level against the euro since the global financial crisis earlier this month. Hungary’s central bank has not intervened in foreign exchange markets but it raised interest rates by 1 percentage point last week, helping the forint to recover from its recent lows against the euro.
The ECB said: “In the context of heightened geopolitical tensions triggered by the Russian invasion of Ukraine, the lines are designed to prevent spillover effects in euro area financial markets and economies that might adversely affect the smooth transmission of the ECB’s monetary policy.”
Poland has recently been an outlier as one of the few big European countries outside the eurozone not to have a financing agreement with the ECB. The Frankfurt-based central bank already has similar arrangements with Switzerland, Sweden, Denmark, Romania, Serbia, Croatia and Bulgaria, as well as the US, UK, China, Japan and Canada.
The latest moves by the ECB were separate to its discussions with the European Commission on ways it could help Ukrainian refugees, many of whom are struggling to swap Ukrainian hryvnia into other European currencies.