ANNUAL REPORT 2008 - Polymer Bank Notes of the World

Estonian kroon and the Lithuanian litas couldjoin ERM II with their existing currency boardarrangements in place. The Latvian authoritiesdecided to maintain the exchange rate of the lats atits central rate against the euro with a fluctuationband of ±1%. The agreements on participationfor the countries whose currencies joinedERM II in 2004 or later (i.e. all the countrieslisted above except Denmark) are also all basedon a number of other policy commitmentsby the respective authorities. These relate to,among other things, the pursuit of sound fiscalpolicies, the promotion of wage moderation andwage developments in line with productivitygrowth, the pursuit of prudent credit policiesand the implementation of further structuralreforms.Prior to the collapse of Lehman Brothers inSeptember 2008, money market spreads wererelatively stable in most of the above-mentionedcountries, some volatility in the Latvian marketnotwithstanding. In the fourth quarter of 2008,while exchange rate developments continuedto reflect the official exchange rate regimes,the intensification of the global financial crisis,the deteriorating economic outlook, investors’concerns about external vulnerabilities in somecountries, together with credit rating downgradesfor Latvia and Lithuania and decisions on thepart of credit rating agencies to place Estoniaunder review for a rating downgrade, contributedto a rapid and pronounced widening of bond andmoney market spreads vis-à-vis the euro area inall ERM II countries except Slovakia. In Latvia,where the money market spread widening wasparticularly pronounced, and in Denmark, thecentral banks supported their currencies withforeign exchange intervention and by increasingthe official interest rate spreads vis-à-vis theeuro area. Against the background of a sharpdeceleration in economic activity and tensionsin the financial system, Latvia nationalisedits largest domestically owned bank and inDecember 2008 arranged a €7.5 billion jointinternational financial support programme. Theprogramme includes measures to stabilise thefinancial sector, substantial domestic economicreforms, fiscal consolidation and significantpublic wage reductions, and is based onmaintaining the current narrow-band exchangerate peg with a view to achieving Latvia’s policygoal of entering the euro area at the earliestpossible date.By contrast, the prospect of Slovakia joining theeuro area appears to have shielded the Slovakkoruna from the negative impact of the globalfinancial crisis. In the first half of 2008 thekoruna strengthened considerably against theeuro. On 29 May the currency’s central rate wasrevalued by 17.6472% to SKK 30.1260 againstthe euro. After the decision of the EU Council inJuly 2008 allowing Slovakia to adopt the euro,the Slovak koruna remained close to its newcentral rate, which was also the rate at which itwas converted to the euro when the latter wasintroduced in Slovakia on 1 January 2009.Turning to the currencies of the non-euro areaEU Member States that did not participate inERM II, developments varied considerablyacross countries (see Chart 39). Most currencieswere broadly stable in the first half of 2008,while some, such as the Czech koruna,Chart 39 Developments in non-ERM II EUcurrencies(daily data; index: 2 January 2008 = 100)140130 130120110 110100GBPSEKCZKHUF90 908080Jan. Apr. July Oct. Jan. Apr. July Oct. Jan.2007 2008 2009Source: ECB.PLNBGNRON140120100ECBAnnual Report200891