Nov. 4 (Bloomberg) -- Polish central bank Governor Slawomir Skrzypek said a temporary lifting of rules capping public debt may be warranted even as the government scrambles for ways of containing the swelling budget deficit.

Finance Minister Jacek Rostowski has denied a report the government may suspend the rule that triggers budget austerity measures if debt rises above 55 percent of gross domestic product. Instead, Prime Minister Donald Tusk’s administration may divert worker contributions to private pensions into a state-controlled account. It may also sell Eurobonds next year, Deputy Finance Minister Dominik Radziwill said today.

Skrzypek said in a Nov. 2 interview that suspending public debt thresholds is “warranted” if it forms part of a broader plan to restructure state spending. The lack of a coherent government plan to avoid breaching the rules has sparked concern among investors and economists.

“This confirms the government has its back to the wall on public debt,” said Maja Goettig, chief economist at Warsaw- based Bank BPH SA. “You can see the mixture of desperation and determination to avoid breaching the legal limits.”

Skrzypek said in the interview that “the size of the budget deficit, so long as it’s temporary, isn’t bad in itself.” That stance may fail to assuage concerns that the European Union’s biggest eastern member is failing to rein in the deficit at a time when other countries in the former communist region are reducing their shortfalls.

‘Get Anxious’

The European Commission estimates Poland’s public debt will breach the 55 percent of GDP limit next year and exceed the 60 percent constitutional threshold in 2011.

“It doesn’t take long before investors start to get anxious about issuance,” said Pasquale Diana, a London-based emerging-markets economist at Morgan Stanley & Co., by phone. Lifting the debt limit “would risk an adverse market reaction, with rising yields and a sell-off of the currency. It would signal the authorities do not view fiscal discipline as a priority.”

The zloty has slipped since the middle of last month and is down 1.9 percent against the euro since Oct. 15. The currency was trading at 4.2642 per euro at 8:13 a.m. in Warsaw, Bloomberg data show

The public deficit will widen to 7.5 percent of GDP next year and to 7.6 percent in 2011, from 6.4 percent this year, the European Commission estimates, making Poland the only central European country with a growing shortfall.

‘Coherent’

“Taken by themselves, the debt numbers don’t look good, but compared to other countries, Poland’s situation isn’t that bad,” Skrzypek said. “What’s needed is a coherent, clear plan for resolving long-term the fiscal problems; suspending the limits could be a feature of this plan, not the main element.”

The country is struggling to contain its deficit even after becoming the only EU member to navigate the credit crisis without falling into recession. The commission expects Poland to grow 1.8 percent next year after expanding 1.2 percent this year. The central bank has indicated it is ready to keep policy loose until recovery takes hold.

“It makes no sense to suffocate growth by tightening rates just as the economy is struggling to take off,” Skrzypek said in the interview. Poland is lagging behind the euro area in the economic cycle and its interest rates are higher, meaning “our likely course of action is slightly different,” he added.

‘Lose Patience’

Low borrowing costs and the prospect of local elections at the end of the year, presidential elections next year and parliamentary elections in 2011 threaten to erode the political will to commit to austerity measures.

“The fiscal numbers are not good but are you going to tighten policy when you’re going into an electoral cycle?” said Diana. “But if you don’t, at what point the investors lose patience?”

The EU in July started an excessive budget deficit procedure against Poland for violating the bloc’s 3 percent threshold and Prime Minister Donald Tusk was in July forced to abandon his 2012 euro adoption goal.

Tusk openly disagrees with President Lech Kaczynski, his rival in the presidential vote, on the urgency of adopting the euro. Tusk favors a quick currency switch, while Kaczynski, whose twin brother Jaroslaw put off joining the currency bloc during his premiership two years ago, has voiced reservations.

Deficit Swelling

The country’s continued expansion through the global economic turmoil belies its rising unemployment rates. Joblessness rose to 10.9 percent in September, the country’s statistics office said on Oct. 23. That’s pushed up unemployment benefit costs for the state while depleting tax revenue.

The deficit is swelling as regional peers the Czech Republic and Hungary manage to curb government spending and push through austerity measures to stay closer to EU requirements.

Polish public debt will be 57 percent of GDP next year and 61.3 percent in 2011, breaching the legal limits, from 51.7 percent this year, the commission said yesterday. The EU has given Poland a 2012 deadline for bringing its shortfall back in line with the bloc’s limit.

As the government resorts to debt sales to finance its shortfall, companies are left with a smaller market for their own funding needs, threatening to delay recovery as businesses put off investment and hiring.

“Loan and GDP growth will already be slower than the pre- crisis level,” said Diana. “In addition, you may have the crowding out effect with the government needing to borrow 6 percent to 7 percent of GDP and banks may load up on those bonds and not lend much money out to households and corporates. It’s a standard crowding-out effect, where rates go up and maybe investment gets hurt. This is something that could weigh on the recovery.”

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net

Last Updated: November 4, 2009 08:02 EST