VZCZCXYZ0001
RR RUEHWEB

DE RUEHSL #0249/01 1511115
ZNR UUUUU ZZH
R 301115Z MAY 08
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC 1749
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS BRATISLAVA 000249 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR LNORTON 
USDOC FOR 4232/ITA/MAC/EUR/MROGERS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD LO
SUBJECT: Slovak/Euro parity revalued for an unprecedented second 
time 
 
Reftel: Bratislava 216 
 
¶1. (SBU) SUMMARY: At the request of the Slovak government the 
European Union revalued the Slovak koruna's central parity rate by 
17 percent to 30.126 against the Euro from May 29.  This is the 
outer edge of the previous parity of 35.44 set in March 2007, and 
creates a new band of 25.60-34.64 SKK/EUR.  The change is designed 
to account for the strong appreciation of the koruna from 32.251 
SKK/EUR when the European Commission recommended Slovak entry into 
the Euro zone on May 7, to 31.1 two days ago.  A quick jump from 
31.1 to 30.7 SKK/EUR on May 28 prompted the authorities to act.  The 
surge has been fueled in recent weeks by heavy lobbying by Prime 
Minister Fico, with the implicit support of National Bank Governor 
Sramko, for a strong conversion rate.  Both foreign and domestic 
exporters have remained quiet, leaving the lobbying to those in 
favor of a strong conversion rate.  END SUMMARY. 
 
GOS SUCCESSFUL IN PUSH FOR A STRONG KORUNA 
-------------------- --------------------- 
¶2. (U) The Ministers of Finance from the Eurozone and the European 
Central Bank approved the request of Slovak authorities for a 17 
percent revaluation of the conversion rate to 30.126, which was 
announced at 12:30 AM CET on May 29.  This is the second time the 
official parity rate has been revalued, which is unprecedented in 
the history of Euro zone entry.  Slovakia joined ERM II in 2005 at 
an original parity rate of 38.455 SKK/EUR, which was revalued by 8 
percent on March 17, 2007 to 35.4424 SKK/EUR to account for 
Slovakia's strong economic growth, rising productivity and stable 
macroeconomic indicators.  At the time the EC asked Slovakia to 
follow stricter fiscal policy to mitigate inflation pressures. 
 
¶3. (U) Slovakia's economic growth has accelerated to 10.4 percent in 
2007, and 8.4 percent in the first quarter of 2008.  The koruna 
slowly appreciated from 2007, rising to 32.25 in advance of the EC's 
positive convergence report in early May.  Following this assessment 
PM Fico made repeated statements arguing for a strong conversion 
rate to minimize the impact of Euro adoption on Slovak citizens and 
help reign in inflationary pressures (inflation increased to 3.7 
percent in April from a low of 1.2 percent).  The lobby for a strong 
conversion rate continued to grow, fueled by local analysts, with 
almost no counter arguments from the business sector, which would 
have the most to lose from a strong rate.  Slovenska Sporitelna 
analyst Maria Valachyova noted that the koruna rate has been 
"enhanced by Slovak Government representatives supporting as strong 
a changeover rate as possible.  Another positive aspect is the 
Slovak central bank's tolerance towards the strong koruna". 
 
¶4. (SBU) In the lead-up to the revaluation the koruna moved closer 
to the bottom of the fluctuation limit of 30.126, at which the 
National Bank would need to intervene to keep within the Maastricht 
targets.  The currency had reportedly been under pressure by 
currency traders over the past week.  On the afternoon of May 28th, 
the Koruna reached the historic rate of 30.650 SKK/EUR, and was 
traded at 30.730 SKK/EUR by the end of the day.  The appreciation 
has been attributed to speculative trades totalling more than 500 
million EUR coming from Slovak and Czech banks, with investors 
seemingly betting on a stronger conversion rate.  Officially no 
important news from relevant authorities was released, though Eduard 
Pracko from OTB Bank postulated that some traders may have obtained 
insider information about a pending revaluation of the parity. 
 
¶5. (U) At the opening of business May 30 the currency stood at 30.24 
SKK/EUR, while the dollar had dropped to an all-time low of 19.44 
SKK/USD, a 70 percent drop from November 2005 when Slovakia joined 
ERM II.  Although many economic analysts are speculating that the 
new parity will be the final conversion rate, ING Bank's Jan Toth 
highlighted the fact that the EC surprisingly omitted any mention of 
the connection between the new parity and the conversion rate in its 
announcement.  He is concerned that this could leave room for 
further speculation below the 30 SKK/EUR barrier. 
 
INDUSTRY REACTION 
----------------- 
¶6. (SBU) The Slovak business community has been surprisingly quiet 
in recent weeks, despite private comments to EmbOffs from individual 
companies that the strong appreciation of the koruna - more than 25 
percent since joining ERM II in November 2005 - has cut into profit 
margins.  Surprisingly, several business associations even appear to 
support the change. Jan Oravec from Association of Small and Medium 
entrepreneurs noted that he does not see strengthening Koruna as a 
threat for their members, because SME's are mostly in a role of 
suppliers to larger companies and do not realize international 
payments or transactions.  Similarly, Martin Hostak from the 
National Employer's Association (RUZ) explained that large RUZ 
member companies are not disturbed by the strengthening Koruna.  US 
Steel Kosice confirmed this sentiment, noting that the company's 
 
financial transactions are kept in EURO, as US Steel is selling 
their products mainly to European customers. 
 
¶7. (SBU) Tibor Gregor from Klub 500 acknowledged that member 
companies have been harmed by the more than 10 percent appreciation 
since the beginning of the year, but felt that the association was 
powerless to influence the government.  Roman Kovac from Citibank 
thought that lower-added value, less-effective Slovak manufacturers 
will lose from the appreciation, but that the pricing pressures will 
create additional pressure on companies to raise productivity, a 
sentiment that was confirmed by Whirlpool during a recent visit to 
their factory.  Many companies view the strong appreciation of the 
currency as secondary to the challenge of finding qualified labor, 
especially in Western Slovakia where unemployment has dropped 
considerably in recent years.  Some analysts argue that a strong 
conversion rate may even help entice Slovak workers to return from 
abroad. 
 
¶8. (SBU) COMMENT:  The strong appreciation of the koruna in recent 
weeks was driven in large part by the strong push by PM Fico and the 
implicit support by NBS Governor Sramko.  Fico has made it very 
clear that he wants to do all he can to minimize the affects of Euro 
adoption on the average citizen, regardless of the impact on the 
business community.  The Prime Minister was clearly pleased with the 
size of the revaluation, noting that his government had achieved the 
"absolute maximum" that was possible to achieve with the European 
institutions.  He said he would not comment on the conversion rate, 
stating that it will be determined based on ongoing discussions. 
Commercial banks and financial analysts do not think the exchange 
rate will break the psychological 30 SKK/EUR barrier, and estimate 
the final conversion rate to be around 30.3-30.6 SKK/EUR when it is 
set in July 2008.  This is seen as an equilibrium range for the 
economy through the end of 2009. END COMMENT 
 
OBSITNIK