Ruble Fears Grip East Europe Units

WARSAW, Poland -- Eastern Europe's currencies all tumbled Wednesday as shockwaves from Russia's financial market earthquake spread through the entire region.

Analysts said the region's currencies would not stabilize, much less recover, unless the ruble recovered.

The Polish zloty and the Czech koruna, the region's top gainers in 1998, were hardest hit by Moscow's problems, but even the Hungarian forint lost ground in the wake of foreign capital fleeing Russia.

"Things in central Europe are dictated by events in Russia and will continue to be so. The situation in Russia is giving people an excuse to take profits in some countries," said Ashley Dodd-Noble, an economist at Paribas in London.

Analysts said the first chance of a stabilization for the currencies could come if the ruble moved away from the brink of devaluation after the Russian Central Bank tripled interest rates to 150 percent Wednesday.

"Most of Eastern Europe has headed south on the currency side, but now that the ruble is stabilizing, or should stabilize, we should see some stability coming into those currencies as well," Richard Gray, an economist at Bank of America in London, said.

Russian and foreign investors, panicking over press reports that the government could be preparing a devaluation of the currency, on Wednesday sold treasuries and shares, depressing the ruble.

The tripling of interest rates, however, helped push the ruble back.

Analysts said the koruna and the zloty suffered additionally because earlier this year currency appreciation was used to stifle inflation in the Czech Republic and Poland, while in Hungary the forint remained locked in a tight band.

The koruna took one of its biggest single day falls since its mid-1997 flotation as the negative mood toward emerging markets coupled with pre-parliamentary election jitters.

"Big London houses started aggressively selling Czech crowns right at the open. It's a move to take profits from long positions before the election [June 19 to 20]," said Jan Strupek of Komerci Banka in Prague.

The koruna fell 2 percentage points against the Deutsche mark to around 18.8 from 18.3 at the opening.

The Czech central bank, concerned over the drop, said it was ready to act on behalf of its currency but did not specify any particular level it would defend.

The zloty tumbled 1.5 points against its currency basket to its lowest level in more than two months, with the outlook bearish until Russia's financial markets calm down.

"I don't think that anybody would want to buy the zloty until it's more clear what's going to happen in Russia. If we see signs that the situation in Russia is improving, then I'm sure there will be zloty buying," said Andrew Kenningham, an analyst at Merrill Lynch in London.

The zloty closed at 5.14/4.91 percent on the stronger side of its 20 percent trading band, much weaker than Tuesday's close at 6.86/6.81 percent.

The Hungarian forint closed at its lowest level this year against the currency basket at 1.44 percent stronger than parity compared to 1.8 percent at the opening.

"We do not expect too much volatility in the currency as it is artificially pulled down to rather low levels, given the surplus in the balance of payments," said Istvan Racz, economist at Credit Suisse First Boston in Budapest.

Analysts said if Russia's financial market crisis sparked a recession in Russia, then Poland, a large trade partner to the Commonwealth of Independent States, would lose the most.

"Should there be economic troubles in the CIS, then all of the region's currencies would remain suspicious, especially the zloty," Racz said.