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. Last Updated: 07/27/2016

Weak Zloty Brings Shoppers to Poland

ReutersA woman closing her trunk, with Lithuanian license plates, after shopping at a supermarket in Suwalki last month.
SUWALKI, Poland -- Shoppers invading Poland for bargains in the weak zloty are now a common feature of Eastern Europe's recession. But for its Baltic neighbors, the strength of their currencies spells pain ahead.

Thousands like Lina Vargaliene have started shopping at home in Lithuania only for basics like bread and milk.

For other items, they come to this northern Polish town to take advantage of a drop in the zloty while their currency, the litas, stays pegged to the euro.

"Look, everyone is a 'happy shopper' here," said Vargaliene, 44, from Marijampole, about 35 kilometers from Poland. "We only buy bread, milk and sour cream back in Lithuania."

Vargaliene said the weakness of the Polish currency was helping her save the equivalent of a month's salary. Lower value-added tax in Poland has also made many items cheaper, and merchants at the Suwalki market are enthusiastic.

"I don't care about the zloty fall," said Krzysztof Toczko, a Polish poultry seller. "I am happy there are so many customers, I am selling 10 times more than before."

If people on the market are delighted with the fact the zloty has fallen to about 1.4 to the litas from near parity, for policymakers in the Baltic states of Lithuania, Estonia and Latvia, it's proving to be a headache.

They have so far kept their currencies pegged to the euro rather than letting them devalue. But either route would mean pain for ordinary people.

Devaluation -- advocated by influential economists as a swift release of pressure on a fundamentally weak currency -- would hurt the tens of thousands of homeowners who borrowed in euros during the boom years of credit growth and could drive up the cost of imported goods, boosting inflation.

But the alternative is equally hard: allowing the air to go out of the economy through wage falls, job losses and deflation as a bid to win back competitiveness.

Baltic governments and central banks say either price is worth it, as the ultimate goal is to get through the bad times and adopt the euro soon.

Ints Kalnins / Reuters
People lining up near a poultry store at a market in Suwalki last month.

In Lithuania, shopkeepers are already hurting. "Retailers selling food products have seen their turnover fall 10 to 13 percent nationwide in January and February, while turnover in districts bordering Poland fell 30 to 35 percent," said Marius Busila from the Lithuanian retailers' association.

The depreciation since late last year of currencies in Russia, Ukraine, Belarus and Poland has added to questions about the Baltic states' wisdom in holding on to currency pegs during the recession.

Ratings agency Fitch last week downgraded its credit rating on all three Baltic states. Like fellow agency Standard & Poor's, it assigned Latvia a rating below investment grade, otherwise known as junk.

Questions have focused on Latvia, the worst hit so far, which last year turned to the International Monetary Fund and European Union for 7.5 billion euros ($9.96 billion) to shore up its finances.

Latvia rejected IMF suggestions that it devalue the lat and won support from the European Commission, which feared that its neighbors would follow.

That would have boosted the expense of repaying mortgages and other debts taken out in euros. In the Baltic states, banks have outstanding mortgages of about 23 billion euros.

With the Baltic bank system now dominated by Nordic groups such as Swedbank and SEB, the risk extends to the west, leading Sweden, Finland and Denmark to join Latvia's IMF rescue.

Although the Baltic authorities have consistently faced devaluation rumors in recent months, Latvian Central Bank Governor Ilmars Rimsevics is a strong defender of the pegs, arguing that devaluation would simply inflate the country's debts.

"One should ask these gentlemen whether they want pensioners to lose the remaining money they have," he said in an interview with the Latvijas Avize newspaper in March.

"Do they want to make many families bankrupt who will be forced to lose the flats they have bought with credit?"

Even some exporters -- who would be textbook beneficiaries from the lower production costs of a weaker currency -- agree with him. The side effect of increasing the debt would mean that their labor costs would rise, they say.

"Strictly from an accounting point of view, a devaluation should benefit us," said Gediminas Ceika, CEO of Lithuanian fridge manufacturer Snaige, which blamed currencies for a cost of 8.4 million litas ($3.25 million) last year.

"But that advantage would not last long with labor costs returning to the previous levels," he said, adding that labor costs accounted for about 8 percent of his total with most raw materials and components charged in euros.

Instead of changing the currency pegs, Latvia, Lithuania and Estonia's governments and central banks are hoping that the recession in their countries will force wages and prices down in what they call internal devaluation.

Latvia's economy shrank 10 percent in the final quarter of 2008 and the government has forecast a slide of 13 percent this year. The government slashed public sector wages by 10 percent, with a further 20 percent cut due this year.

For now, the goal for all three nations is to keep inflation in check and stop their budget deficits from rising so they can move from the fixed local currencies to the euro.

Estonia wants to adopt the euro in 2011, Lithuania is eyeing 2011 or 2012 and Latvia is aiming for 2012.