Bloomberg News

Polish Debt Upgrade Delayed as Rating Companies Seek Results

November 23, 2011

(Updates with bond, CDS prices in sixth paragraph, comment from economist in 19th-20th.)

Nov. 22 (Bloomberg) -- Polish hopes for a credit-rating upgrade have been dashed by the three major rating companies, which want to see the results of the re-elected government’s plan to trim the budget deficit and lower debt.

Prime Minister Donald Tusk on Nov. 18 pledged to increase levies, reduce tax incentives and raise social security contributions for employers. Standard & Poor’s and Fitch Ratings said they need further details to assess the effect of the proposals, while Moody’s Investors Service sees “no immediate effect” on Poland’s rating.

In his first policy speech since winning re-election last month, Tusk had to weigh investor expectations for a promise to narrow the budget gap against his coalition partner’s concern that cuts may endanger economic growth and living standards. He vowed to lower next year’s shortfall to about 3 percent of economic output without “digging into pensioners’ pockets.”

“Talk and no execution definitely wouldn’t fly in this market,” Raffaella Tenconi, an economist at Bank of America Merrill Lynch in London, said in a telephone interview yesterday. “These changes are on paper for now. We haven’t seen what the impact on the budget will be.”

Zloty, Bonds

The zloty has lost 11.5 percent against the euro since June 30, the sixth-worst performer among more than 170 currencies tracked by Bloomberg. It was trading at 4.4511 versus the euro at 11:15 a.m. in Warsaw, down from yesterday’s close of 4.4661.

The yield on the government’s five-year bond due October 2016 fell to 5.154 percent, near the highest since Oct. 5. Five- year credit-default swaps, which hedge against non-payment, traded at 308.7 basis points, compared with Hungary’s 594, according to data provider CMA.

Moody’s Investors Service, which has had an A2 rating on Polish debt since 2002, said Tusk’s plans will have “no immediate effect” on the company’s assessment of the largest economy among the European Union’s eastern states.

“The measures are subject to implementation risk,” Moody’s analysts including Jaime Reusche in New York said in a weekly credit outlook yesterday. “The reforms will take time to produce tangible results, increasing the likelihood that they may be watered down or that support for them may wane under future administrations.”

Timing ‘Uncertain’

Standard & Poor’s, which has an A- rating on Polish debt, said that while plans to overhaul pensions and social security should “help to put public debt on a downward trajectory,” the “timetable for these reforms is as yet uncertain, as are the depth and extent” of the measures.

“We would need further details before we could make an assessment about the impact on the outlook of the sovereign- credit rating,” S&P analyst Leila Butt said yesterday in an e- mailed statement.

Fitch is seeking “substantial information” on the plans before determining their effect on Poland’s rating, said Matteo Napolitano, the company’s lead analyst for the country.

Poland is rated A- by Fitch, two notches below the Czech Republic, another former Soviet satellite that joined the EU in 2004. Hungary, the third-largest of the EU’s eastern economies, is three steps lower. The ratings company will update Poland’s credit grade “no later than the first quarter of 2012.”

External Financing

As well as doubts on the implementation of Tusk’s plan, there are elements outside government control, Napolitano said.

“There should be an improvement in the external financing environment, or at least no further deterioration -- external financing requirements are relatively high in Poland,” he said.

The euro area’s inability to contain a regional-debt crisis that started in Greece more than two years ago has led to a surge in Italian and Spanish bond yields, while the euro has slumped almost 7 percent against the dollar in the second half of this year. Crisis-management efforts by euro-area leaders have done little to stem the turmoil as Italy, the third-largest economy in the 17-member bloc, struggles to persuade investors it can stay afloat without a bailout.

While Poland was the only member of the 27-nation EU to avoid a recession in 2009, this came at a cost. The budget deficit has quadrupled since Tusk first took office in 2007 and public debt reached 52.8 percent of GDP last year under national calculations, close to a 55 percent legal cap.

The government wants to cut public debt to 52 percent of gross domestic product next year and to 47 percent in 2015, when it plans a 1 percent budget gap, Tusk, the first premier in Poland’s post-communist history to be reelected after serving a full parliamentary term, said before his administration won a confidence vote on Nov. 19.

Raising Taxes

Tusk’s plans include raising disability taxes paid by employers by two percentage points, introducing some income tax for farmers, who are currently exempt, and cutting pension privileges for professional groups such as the military and policemen. Other proposals include gradually raising the retirement age to 67 years from 2013.

The increase in the disability levy may provide the budget with 5 billion to 8 billion zloty, helping reduce the deficit and borrowing needs and positively influencing bonds, according to Citibank Handlowy’s chief economist, Piotr Kalisz.

“When the reform details are released, rating agencies may positively evaluate the government plans and their implementation may help the outlook for an upgrade,” he said today by phone.

‘Good Track Record’

The government is considering three possible growth scenarios for next year, ranging from a 3.2 percent expansion to a 1 percent contraction, depending on the situation in the euro area, Finance Minister Jacek Rostowski said this month. Poland will need 8 billion zloty ($2.4 billion) to 9 billion zloty in extra revenue or savings to meet next year’s budget-gap target, assuming 2.5 percent GDP growth, he said Nov. 18.

“Poland has a good track record -- its banking system has been resilient, it’s well regulated, and on the whole, fiscal and monetary policy have been competently conducted,” Napolitano said. “So set against the rest of emerging Europe, not to mention the euro zone, it’s looking pretty good.”

Tusk’s ruling Civic Platform won 207 seats in the 460- member parliament in Oct. 9 elections, while the Polish Peasants’ Party, the junior partner in the coalition that has ruled since 2007, gained 28 seats, giving the two groups a four- seat majority in the chamber.

--With assistance from Monika Rozlal in Warsaw. Editors: Andrew Langley, Balazs Penz

To contact the reporter on this story: Katya Andrusz in Warsaw at kandrusz@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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