Bloomberg News

Poland Faces Zloty Drop on Contagion Risk, Tusk Aide Says

March 12, 2012

Poland faces the risk of the zloty dropping as the country remains vulnerable to contagion if Greece’s debt swap fails to allay investors’ default concern, said Maciej Reluga, an adviser to Prime Minister Donald Tusk.

Tusk will probably miss his budget-deficit target of 3 percent of economic output this year, Reluga, a member of Tusk’s council of advisers, said in a March 9 interview in Warsaw. Investor unease over Europe’s handling of its debt crisis may spark a sell-off before parliamentary elections in Greece and a presidential vote in France, he added.

The zloty weakened 0.6 percent against the euro to 4.1130 as of 4:57 p.m. in Warsaw. Poland’s currency is the world’s best performer against the EU’s common currency this year, having gained 8.6 percent after it slumped 11.2 percent in 2011 as investors shunned riskier assets. Poland’s deficit widened to 7.8 percent of gross domestic product in 2010.

“We’re running out of reasons for appreciation to continue,” Reluga said. “It’s very hard to believe there’s any chance of” meeting the deficit target. “Polish officials repeating that the deficit will be below 3 percent this year may create unnecessary expectations among investors, while it may be really difficult to deliver such a target.”

Last week, Greece pushed through the biggest sovereign restructuring in history, with private holders forgiving more than 100 billion euros ($132 billion) of debt, a condition for the nation to win the bailout it needs to repay about 14.5 billion euros of debt coming due next week. German Finance Minister Wolfgang Schaeuble said last week it would be a “big mistake” to consider the region’s debt crisis ended.

Growth Outlook

The Polish economy, the biggest among the EU’s eastern members, will probably grow 2.5 percent this year, the fastest pace in the trading bloc, after expanding 4.3 percent in 2011, the European Commission said last month. The euro area buys 54 percent of Polish exports.

After becoming the first Polish prime minister since the collapse of communism in 1989 to win a second consecutive term, Tusk pledged to increase levies and cut pension privileges to combat the budget gap.

Focusing on the deficit risks strangling the economy as consumer demand wanes, Reluga said. Individual consumption increased 2 percent in the fourth quarter of 2011 from the year- earlier period, slowing from a 3.7 percent pace in the first quarter.

‘It’s the Direction’

“For the financial markets, for investors, it’s the direction that’s important,” Reluga said, adding that narrowing the deficit to 3.3 percent or 3.4 percent would be sufficient. “The measures Tusk proposed last year are enough if they’re put into practice. Any tougher steps would be mistaken at this stage as they could endanger economic growth.”

The government’s plan to raise the retirement age to 67 from 60 for women and 65 for men sparked a dispute with the parliamentary opposition and its own junior coalition partner. Tusk will probably reach an agreement “in the end,” said Reluga, who is also the chief economist of Bank Zachodni WBK SA (BZW), a Polish unit of Banco Santander SA. (SAN)

“There’s no point in watering down the government’s proposals to increase the retirement age,” he said. “We’d just have to change the rules again in a few years.”

Credit-Rating Outlook

The government executing its plans may help Poland’s chances of a credit-rating upgrade next year, according to Reluga. The country’s debt is graded A2, or the sixth highest, at Moody’s Investors Service and one step lower at A- at Standard & Poor’s and Fitch Ratings. The outlook is stable at all three companies.

“I can imagine a change in the outlook to positive, which would already be doing quite well, considering that so many countries have been downgraded lately,” Reluga said. “For a change in the rating, Poland will have to achieve the reforms that have been proposed, and not just talk about them. If they’re introduced, we’ll have a chance of an upgrade next year.”

Poland also faces the risk of foreign investors pulling out of the country’s bonds if concern rises that Europe’s debt crisis will worsen, Reluga said.

Greek credit default swaps rose to 25,423 basis points on March 9, compared with Poland’s 184 basis points basis points, according to CMA, which is owned by CME Group Inc. (CME) and compiles prices in the privately-negotiated market.

Poland’s benchmark five-year bond has outperformed comparable German debt in the past three months as Tusk’s government reiterated its commitment to budget cuts. Foreign investors participated “substantially” in a bond sale at the lowest yield in six years last week, the Finance Ministry said.

‘We’re Not Immune’

About a third of domestic Polish debt is owned by foreign bondholders, compared with 12 percent in the neighboring Czech Republic. As much as 44 percent of domestic Polish debt maturing this year is owned by foreign bondholders, according to Bloomberg and Finance Ministry data, with almost a third due next month.

“When risk aversion reaches a certain threshold, we’re not immune,” Reluga said. “There’s a risk of capital outflow from Poland, which could be dangerous for us now, because there’s a lot of foreign capital in the fixed-income market, and a lot of bonds maturing in 2012 are in the hands of foreign investors.”

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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