Austerity Alone Scorned as Tusk Rates Below Czech: Poland Credit

For the first time ever, Poland’s borrowing costs in euros fell below the Czech Republic’s as investors favor Prime Minister Donald Tusk’s focus on preserving growth over strict austerity measures.

Yields on Poland’s 10-year euro bonds fell below those on similar Czech notes for the first time on record on Oct. 15, according to data compiled by Bloomberg. The yield was one basis point, or 0.01 percentage point, below the Czech counterpart today, compared with a premium of 47 basis points two months ago. Polish gross domestic product expanded 2.3 percent from April to June, while the higher-rated Czech economy has contracted since the last quarter of 2011.

Six weeks ago, Tusk’s government relaxed plans to cut the budget deficit this year and next to allow more spending to stimulate the economy. Czech Premier Petr Necas meanwhile is struggling to push through tax increases designed to cut the deficit as a party revolt threatens to undermine him.

“What the markets seem to care about these days is growth,” Mateusz Szczurek, ING Groep NV’s chief economist for central and eastern Europe, said by phone on Oct. 23. “As long as you have growth, and you don’t do anything really erratic, then the level of deficit has little impact on bond yields.”

Relaxing Austerity

Polish local currency bonds of one year or longer have returned 18 percent in euro terms this year, compared with a 14 percent advance by Czech koruna bonds and an 9 percent average from euro-area government bonds, indexes from the European Federation of Financial Analysts Societies and Bloomberg show.

Tusk is relaxing austerity after the EU’s largest post- communist economy grew at the slowest pace in almost three years in the second quarter. The government raised its 2012 target to 3.5 percent of GDP, from 3 percent, and its 2013 target to 3 percent, from 2.2 percent. Tusk already cut the gap from 5 percent in 2011 and a record 7.8 percent in 2010.

“The priority is to maintain economic growth,” Tusk said in a speech in parliament on Oct. 12. “We should be determined to maintain this positive growth rate, even at a lower level than in the recent years, regardless of the cost.”

In the Czech Republic, Poland’s southern neighbor and the second-largest economy in the eastern EU, the government estimates the fiscal gap at 3.2 percent of GDP this year, compared with the initial target of 3.5 percent.

Lost Majority

Necas, who lost his parliamentary majority in April amid personnel and budget rows, credits previous austerity measures with helping reduce domestic bond yields.

The country must meet its goal of cutting the deficit below 3 percent next year to maintain “credible” fiscal policy,” Necas said on Sept. 20. Previous tax increases have sapped household spending and helped the economy shrink for three consecutive quarters, counted from the previous three months.

Necas has failed to win backing from his lawmakers for a package of measures that include more increases in sales taxes and a new tax rate for higher earners. He has staked the government’s survival on the bill by tying its approval to a confidence vote, which is expected as early as next week.

While yields on Polish 10-year zloty bonds have fallen 1.4 percentage points this year to 4.49 percent today, the equivalent Czech yields in koruna decreased 1.44 percentage points to 2.15 percent, helped by record-low interest rates from Prague’s policy makers, data compiled by Bloomberg show.

Investment Plan

Tusk announced a 300 billion-zloty ($95 billion) investment plan on Oct. 12 to create jobs and protect economic growth, while keeping Poland on the path of decreasing budget deficits.

“The Polish government has recently scaled back planned fiscal consolidation,” Danske Bank AS emerging markets analysts wrote in a note on Oct. 15. “This is hardly positive from an investor perspective, but in our view it is not jeopardizing fiscal sustainability.”

Poland is rated A2 by Moody’s Investors Service, the fifth- lowest investment grade and one below the Czech Republic.

The extra yield investors demand to hold Polish dollar- denominated bonds rather than U.S. Treasuries fell six basis points, or 0.06 percentage point, to 116 at 11 a.m. in Warsaw, indexes compiled by JPMorgan Chase & Co. show.

The spread between Poland’s 10-year zloty bond and German bunds narrowed six basis points to 289 today, data compiled by Bloomberg show. The zloty strengthened 0.3 percent to 4.1445 against the euro, extending this year’s gains to 7.8 percent.

Debt Insurance

The cost to insure Polish debt against non-payment for five years using credit-default swaps declined one basis point to 95, while Czech swaps were one basis point higher at 81, data compiled by Bloomberg show.

Poland’s swaps cost 88 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.

Poland endured the world’s third-biggest austerity cuts in 2010 to 2012, which reduced the government’s structural deficit by 4.1 percent of GDP, trailing only Greece and Portugal, according to data from the International Monetary Fund examined by Bloomberg Rankings. The Czech Republic is 20th on the list with a 1.9 percent fiscal balance reduction in the period.

“Political troubles in the Czech Republic, usually seen as the safe haven of central and eastern Europe, are transferring this status to Poland at the moment,” Felix Herrmann, an analyst for emerging markets at DZ Bank AG in Frankfurt, said in e-mailed comments to Bloomberg News on Oct. 22.

To contact the reporters on this story: Peter Laca in Prague at placa@bloomberg.net;

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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