Naked Ban Means CDS Safest Relative to Germany: Poland Credit

Poland is outperforming higher-rated Germany in the credit-default swap market, cutting the premium to the least since Lehman Brothers Holdings Inc. collapsed four years ago, helped by rule changes designed to limit speculation.

The extra cost of insuring Polish government bonds for five years with default swaps, or CDS, over Germany fell to 45 basis points on Oct. 11, the smallest gap since August 2008, a month before Lehman’s crash deepened the global financial crisis. The yield on benchmark 10-year notes fell to a seven-year low of 4.46 percent yesterday, according to data compiled by Bloomberg.

European Union regulations will from Nov. 1 ban ownership of sovereign credit-default swaps without holding the underlying debt assets, known as naked long positions, to prevent investors from pushing up insurance costs. Bond holders are lured to Poland by its economic growth, budget discipline and speculation the central bank will lower interest rates.

“Poland is enjoying massive inflows into the bond market as yield hunters like the economic and fiscal story, higher returns and rate-cut expectations,” Dmitri Barinov, who helps manage the equivalent of about $2.4 billion of emerging European debt at Union Investment Privatfonds, said yesterday by phone from Frankfurt. “The ban on naked default swaps is prompting investors to buy bonds or sell the CDS.”

Less Risky

Policies including the European Central Bank’s pledge to expand its bond-purchase program have improved perceptions of creditworthiness across the continent, while the naked ban has also helped lower costs. The 182 basis-point drop for Polish swaps this year compares with declines of 76 basis points, or 0.76 percentage point, in Germany, 94 in the Czech Republic, 251 in Italy, 351 in Hungary and 667 in Portugal.

Investors are rewarding Prime Minister Donald Tusk for combining budget discipline with gross-domestic-product growth, projected to be the fastest in the EU this year. While Poland plans to lower the budget gap to 3.5 percent of GDP this year from 5 percent in 2011 and a record 7.8 percent in 2010, Tusk on Oct. 12 announced a 300 billion-zloty ($95 billion) spending plan to spur growth in the EU’s biggest eastern economy.

Four-Year Low

The Polish CDS rose three basis points to 98 at 3:19 p.m. in Warsaw, after reaching a four-year low of 84 on Oct. 17. The swaps cost 92 basis points less than the average for countries in eastern Europe, the Middle East and Africa included in the Markit iTraxx SovX CEEMEA Index, compared with an average 78 basis-point gap in the first half of 2012. The spread widened to 108 basis points on Oct. 10, the most since February 2008.

The swaps, which decline as perceptions of creditworthiness improve, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

While the naked ban is helping Poland by reducing swings in the CDS price, the contracts have fallen too low, according to Felix Herrmann, an analyst for emerging markets at DZ Bank AG in Frankfurt. Tusk’s additional spending program risks inflating future deficits, he said in e-mailed comments yesterday.

“Although Tusk doesn’t say so, his investment program will certainly affect the budget negatively, and this risk is not yet priced in the market,” Herrmann said. “Polish CDS shouldn’t be below 100 basis points, and bonds also seem overbought.”

Extra Yield

The extra yield investors demand to hold Polish dollar bonds rather than U.S. Treasuries fell four basis points to a two-year low of 117 today, indexes compiled by JPMorgan Chase & Co. show. The premium on Polish 10-year zloty bonds over German bunds widened seven basis points to 291, while the zloty weakened 0.6 percent to 4.1324 per euro today, data compiled by Bloomberg show. The currency has appreciated 8 percent in 2012.

Poland’s public debt stands at 55 percent of GDP, less than the 92 percent average from the euro region, European Commission estimates for 2012 show. Polish CDS are the third-cheapest in emerging Europe after higher-rated Estonia and the Czech Republic. Moody’s Investors Service rates Poland at A2, six levels below Germany’s top Aaa ranking.

Monetary-policy makers across the world are extending stimulus measures, with the ECB pledging unlimited purchases of bonds from the most-indebted members to revive stalled growth and calm concern that the 17-member bloc will fall apart. The euro-region economy, which buys 54 percent of Poland’s exports, will contract 0.3 percent this year while the Polish growth will slow to 2.7 percent, European Commission estimates show.

“ECB policy makers have found a tool to convince markets, reducing the euro break-up risk,” Peter Schottmueller, who helps manage the equivalent of $5.3 billion in emerging-market debt at Deka Investment GmbH in Frankfurt, said in e-mailed comments on Oct. 19. “If the situation in southern Europe improves, it has indirect positive effects for Poland.”

To contact the reporter on this story: Krystof Chamonikolas in Prague at

To contact the editor responsible for this story: Gavin Serkin at

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