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The Warsaw Voice » Business » March 4, 2009
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Troublesome Options
March 4, 2009 By A.R.    
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The government is debating how to help companies struggling with currency options. Over a year ago, when the Polish zloty was appreciating, entrepreneurs selling services or goods for foreign currency, fearing losses, signed currency option contracts with banks to protect against foreign exchange risk.
However, not all such contracts were meant to hedge currency risk; some of them were speculative. Ultimately, many contracts caused companies to suffer losses. A report by the Commission for Banking Supervision shows that losses due to currency options could be as much as zl.15 billion. However, experts say the figure could be several times higher.After a government meeting Feb. 24, Prime Minister Donald Tusk said the possible losses were not as great as earlier feared. He said the problem was caused jointly by the irresponsibility of companies signing the contracts and the banks, and that half of the businesses have concluded successful negotiations with their banks. He also said that a stabilized zloty would alleviate the effects of the options contracts because every grosz by which the zloty appreciates means lower company liabilities. The government will return to the options problem at its next meeting, he said, and meanwhile will search for ways to help companies disentangle themselves from currency options.The Office of the State Attorney, the body that handles major court cases on behalf of the State Treasury, has prepared a "guide" for entrepreneurs who want to challenge their contracts with banks in court. The government has also asked the Ministry of Justice to draft a law on claims in collective proceedings. This would allow entrepreneurs with similar cases for review (for example, concerning currency options) to appear before the court in a single proceeding, similar to a class-action suit.


Comment
Sergei Krasulenko of ISD Polska:
The present situation on the market-the problems many companies are having with currency options and banks with bad loans-shows a lack of risk assessment by both parties to the transaction.On the one hand, companies started investing in complicated financial instruments previously reserved for banks and investment funds, forgetting their core business activity: production. On the other hand, banks relaxed their loan policies, which led to a situation in which we had to face up to difficulties with obtaining capital and even a global financial crisis.

The lack of available funding for companies means that now, even if companies report good results, they have to struggle with payment delays, and the consequence of this could be the loss of financial liquidity. Hence the dramatic attempts by management boards, not only at listed companies, to improve the market valuation of their companies. The question now is what indices will play a key role when investors assess the value and risk of those companies.That is why asset value to market value is the index that shareholders of a given company may find worth considering. The important thing in the current situation will be not a technical analysis but a fundamental analysis, where the indices should be calculated not on shares' market value but on the value of company assets. Mid-year will be the breakthrough moment for investors, when they see the consolidated financial statements for 2008. It is also worth checking if assets have been evaluated according to their fair value.
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