European bank investigations and Poland's currency game

Op-ed

News that Swiss UBS suspended a number of senior traders in an ongoing international probe connected to the alleged manipulation of interbank borrowing rates has sent still more shock waves through a Europe bogged down in the ongoing euro crisis?but this arguably (and hypocritically) ignores an issue also at the heart of at least Central European business; this being the official use of European Union funds and the effect on currencies and currency trading.

This may seem a bit of a leap, but first the background to the interbank rate scandal. The current interbank rate probe has seen traders fired or suspended from banks including UBS, the Royal Bank of Scotland, Deutsche Bank, JP Morgan Chase and Citigroup, according to the Financial Times. The investigation is currently attempting to determine whether manipulating rates through panel submissions influenced benchmark borrowing rates.

This is big money, and the current investigation appears to be expanding daily. Put simply, capitalism is not capitalism when behind-the-scenes manipulation reaches this scale, and the bumping of Libor rates could potentially unfairly influence billions if not trillions of dollars in financial products.

But here is the rub: once again it appears that a small group of traders was moving behind the scenes to make money unfairly and at the potential expense of others. Yet - and not to belittle the noble efforts of current investigators - such efforts do appear to be farcical considering ongoing, if not institutional, currency intervention in the EU.

A case in point would be Poland. As any savvy market observer will note, the Polish zloty rarely falls out of the PLNEUR 3.8-4.2 range. This is not just happenstance, but as has been noted by both journalists (and which is also highlighted by the rater cynical comments below currency news stories), the zloty "remains" in this range due to intervention by the Polish Finance Ministry and Central Bank.

The first reaction to such a statement may be a simple "so what"? Yet closer examination reveals  another factor at play - the use of European subsidies to bolster the zloty.

In short, the Polish Central Bank uses euros sent to develop the country and bring it up to EU standards to play the currency market. 

This little secret - which has not been a secret since at least October of last year - and which has been noted in various articles, such as this one by leading Polish daily Gazeta Wyborcza;

http://wyborcza.biz/biznes/1,100969,10400342,NBP_interweniowal_na_rynku_walutowym.html,

basically works as follows: European Union funds come into the country, and Poland, smartly, waits until the opportune time to cash in these euros for zlotys, which can then be distributed to various infrastructure programs, development programs, etc.

This means that by using a billion euros here or two billion there, Poland can effectively intervene in the currency market and keep its currency stable - which is both good for the government and good for Poles.

That said, this is not capitalism. This is intervention in its most stereotypical form - and arguably it makes current investigations (not to mention other Brussels inquiries over unfair competition), such as that noted above, seem no less than farcical. Ask anyone in export/import just how currency weakness and strength plays in the success of their company - and how the strength of competing currencies helps or hinders business - and the use of EU funds in such circumstances seems ironic at best.

Yet there is another aspect of such currency management. The zloty-to-euro range of 3.8-4.2 is quite well known on the market. This means that those willing to play the typically tricky money markets can quite easily hedge their bets. If the current trend continues?and there seems to be little likelihood that this will change - even if the zloty slips PLN/EUR 4.9 in a period of high volatility, smart traders will understand that this is not only temporary, but that the Polish Central Bank will step in, and the zloty will not only strengthen, but it will strengthen to a specific level.

There is little gamble left in this game - and no, this is not simply a question of knowing the market. Not only can I call the game, but I can call the score. And it's made possible through access to EU funds.

Call it what you will. Call it smart protectionism. The canny use of a loophole. Survival of the quickest. Call it anything you want, but don't call it free market capitalism, for - like much in the EU - that is exactly what this is not. For, as they say, time stands still for no man. The average Joe Kowalsky is making business decisions, taking out a mortgage, considering hiring or buying assets for the future.

Whether overpriced or underpriced, decisions are currently being made based on an only currently sustainable fantasy. The real question may well be what to call the consequences of such actions if one day the ammunition for such zloty intervention runs out.

Then again, the results of EU policy often have quite accurate and highly descriptive names - even if such terms are not appropriate for print.