Polish Default Swaps Level ‘Quite Absurd,’ Radziwill Says

The cost to insure Poland’s government debt against non-payment is at a “quite absurd” level, according to Deputy Finance Minister Dominik Radziwill.

Poland’s five-year credit-default swaps, which increase as the perception of the country’s creditworthiness deteriorates, widened last month to 236 basis points, the highest level since April 2009. The contracts rose 67 basis points in the past 12 months, the biggest increase among 20 emerging-market economies tracked by Bloomberg.

“The level of our CDS is probably quite absurd right now,” as they are higher than almost all countries in Asia and Latin America, Radziwill said in an interview from his Warsaw office on Sept. 2. “The CDS prices don’t really tell you much currently. In my opinion there is some dysfunction of this market.”

The country’s default swaps traded six basis points higher at 233 basis points today, according to data provider CMA. The contracts on Russia, which is rated two steps below Poland at Baa1 by Moody’s Investors Service, stood at 202 basis points. Brazil default swaps, with a Baa2 rating at Moody’s, traded at 153 basis points.

Poland’s bonds rallied in August pushing the yield on five-year notes to the steepest monthly drop in 17 on bets the central bank may cut interest rates and as the government financed almost all of this year’s borrowing needs. The yield declined to 4.95 percent as of 5:33 p.m. in Warsaw, the lowest since January 2009, according to bond indexes compiled by Bloomberg.

‘Sizable’ Inflows

Foreign investors in August resumed their buying of Polish government debt after they withdrew the most money from the market since the collapse of Lehman Brothers Holdings Inc. in 2008. Net purchases of Polish government debt in August exceeded net sales of the securities in July and the market saw a “sizable” fund inflows from Asia and Japan, Radziwill said.

International investors reduced their holdings by 4.5 billion zloty ($1.5 billion) in July, the most since September 2008, according to Finance Ministry’s website and data compiled by Bloomberg.

“The outflow we saw in July was technical in nature and the situation was drastically different in August,” Radziwill said. “I don’t expect a sudden exit of foreign investors from our market.”

International investors more than doubled their holdings of Polish Treasury debt to 151 billion zloty in July of this year from 72.1 billion zloty the same month in 2009 to become the biggest investors on the market ahead of local pension funds and banks, according to the ministry’s website.

‘Similar’ Borrowing

The Finance Ministry will begin raising cash for next year’s debt needs mostly at monthly switching auctions, where debt about to come due is swapped for bonds with longer maturities, according to Radziwill. It may also cancel a regular sale of bonds in December, he said.

Borrowing needs in 2012 may be “similar” to this year’s level, Radziwill said. Poland may borrow 10 billion zloty less than the planned 154.8 billion zloty this year, Piotr Marczak, head of the ministry’s public debt department, said on July 29.

Poland may return to international bond markets in the fourth quarter for this year’s last transaction and plans to raise around 4.5 billion euro ($6.4 billion) from foreign debt sales in 2012, according to Radziwill. The sales will include bonds in euros, dollars, yen and the Swiss franc starting as early as the first quarter, he said.

“It’s a standard to issue more at the start of the year,” Radziwill said. “It’s an open question whether we will see some serious turmoil in the euro zone, which looks like a potential risk factor. If not, then I would assume we will carry out a foreign issue in the first quarter.”

The government has the equivalent of 118.8 billion zloty of local- and foreign-currency denominated bonds coming due next year, according to data compiled by Bloomberg. That includes a 750 million-euro bond maturing in March and 24.5 billion zloty of bonds in the first quarter, the data show.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE