When citizens or companies shun the domestic currency it’s often taken as a bad and worrying sign that local trust in it has crumbled altogether.
Take Zimbabwe for example, where the government eventually bowed to the fact that almost nobody trusted the local dollar any more after massive hyper inflation and scrapped the currency altogether without a new replacement. The South African rand is now the preferred currency though any other neighbouring or international currency can also be used.
Alternatively, there was the preferred use of the dollar of Deutschmark across much of Central Europe and the Balkans in the 1990s and earlier because local currencies were still distrusted.
So news that Czech companies are increasingly preferring to do their transactions in euros and the fact its increasingly the preferred currency in which they take out loans might appear to be a vote a no confidence in the local crown.
The business daily E15 reported Tuesday that Czech corporate borrowing in euros this year is running at twice the levels of the previous two years. While the volume of Czech corporate loans have grown so far this year by an overall 3.0 percent, the increase for those loans in euros comes in at 17 percent.
The Czech National Bank, it reports, gave out figures that by the end of July local businesses had taken out loans in currencies other than the crown to the tune of 246 billion crowns. That, it adds, is the first time in history that such foreign currency denominated loans have reached a quarter of the level of those in Czech crowns.
So, shoud you be rushing to be rushing to the bank to offload your Czech crowns into something else? The answer is a blunt ‘no’. The corporate flight from borrowing in Czech crowns is actually a flip side of the many faceted currency equation and is in fact a sign of confidence in the crown.
Essentially, the companies are betting that when the crown comes out of the Czech central bank’s continuing low crown policy - some time probably in the next year or two - that it will strengthen considerably. Hey presto, the loans taken out in euros will be a lot cheaper to repay and the Czech companies will be rejoicing at their good fortune.
Of course, recently installed central bank governor Jiří Rusnok has said that the bank will try to avoid any sharp appreciation of the crown, but if the market decides that the crown is undervalued and decides to bet that way then the bank could have a problem keeping a lid on the rise.
As well as this long term currency bet, there are other factors at play in the preference for non-crown loans. Interest rates in the euro area are still slightly lower in the Czech Republic and the fact that many Czech companies are doing most of their everyday business in euros makes the move less intimidating than it might have appeared in the past.
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