Nov. 2 (Bloomberg) -- Poland’s “massive external borrowing” will cause the government’s creditworthiness to deteriorate and send credit-default swap prices to the highest levels in more than three months, BNP Paribas SA said.

Investors should buy five-year contracts to protect against a default at 116 basis points, BNP wrote in a report to clients. The cost may increase to 150 basis points, the bank said. That would be the highest level since July 21, according to CMA DataVision prices.

Poland, the only European Union country to avoid a recession this year, is relying on foreign investors to help finance a budget gap it expects will almost double next year. The government may suspend a law that obliges it to take tough austerity measures if public debt exceeds 55 percent of gross domestic product, Rzeczpospolita reported, without saying where it got the information. A Finance Ministry spokeswoman denied any such plans, the PAP newswire said today.

Poland “continues to show massive external borrowing and limited fiscal consolidation efforts,” BNP emerging-market strategists led by Shahin Vallee in London wrote. “This is particularly the case as local media reported this morning that the government might scrap the 55 percent debt threshold, which has served as an important stabilizer for markets. We would expect to see more pressure on external debt.”

Debt Sales

The government is selling 36.7 billion zloty ($12.8 billion) of state assets through 2010 and has raised the equivalent of $8.2 billion in foreign-currency bond offerings so far this year, Bloomberg data show.

It has registered to sell as much as 300 billion yen ($3.3 billion) in bonds, according to a filing with Japan’s Finance Ministry on Oct. 26.

The country’s public debt will rise to 51.2 percent of GDP by the end of 2009, according to a Finance Ministry forecast published Oct. 22 by the Warsaw-based Central Statistical Office.

The cost of protecting Polish debt from default was unchanged at 116 basis points today, according to CMA prices at 11 a.m. in London. It has fallen from 418 on Feb. 24, the highest level since at least 2004, to this year’s low of 109.6 on Oct. 15, according to Bloomberg data.

Defaults swaps linked to Bahrain, which has the same A2 debt rating as Poland at Moody’s Investors Service, were at 151.1 basis points on Oct. 30, according to CMA.

Borrowing Needs

BofA Merrill Lynch Global Research reiterated its recommendation that investors buy Polish five-year credit swaps, saying it expects the spread to widen to 160 basis points.

“Poland is likely to tap the international market again sometime in the future given the rising borrowing requirements, which may hurt the credit from a supply standpoint,” Benoit Anne, head of emerging market foreign-currency and debt strategy at BofA in London, wrote in a report dated Oct. 30. The time horizon for the trade is “approximately” three months, Anne said today.

Credit-default swaps protect bondholders against default by paying the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. The contracts rise as perceptions of credit quality deteriorate and a basis point is worth $1,000 on a contract protecting $10 million of debt.

To contact the reporter on this story: Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net

Last Updated: November 2, 2009 09:52 EST