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Zloty Goes to Worst From First as Crisis Risks Tusk Budget

Poland's Prime Minister Donald Tusk
Poland's prime minister Donald Tusk. Photographer: Michele Tantussi/ Bloomberg

Poland, the fastest-growing major eastern European economy, is losing favor with investors as the euro zone’s widening debt crisis undermines confidence in Prime Minister Donald Tusk’s ability to cut the budget gap.

The zloty is down 16 percent against the dollar and 9.9 percent versus the euro this quarter for the worst performance among European currencies, after leading gains in the previous three months. Investors are betting on bigger swings in the zloty than any other European developing-nation currency, based on the implied volatility shown by option prices. Poland’s credit risk is the highest in 29 months compared with Germany, Europe’s biggest economy.

“The zloty was not so long ago the darling of the Europe, Middle East and Africa region -- these days are gone,” Benoit Anne, the head of global emerging-market strategy at Societe Generale SA in London, said in a phone interview. “It used to be a very strong fundamental story and you don’t have it anymore.”

Poland is being punished as slowing economic growth and Oct. 9 elections spur speculation Tusk may fail to cut the budget deficit below the ceiling for euro candidates. While Tusk’s plan rests on the economy expanding 4 percent next year, the prospect of slowing export orders from Europe caused Goldman Sachs Group Inc. to lower its growth forecast to 3.8 percent from 4.2 percent and Bank of America Merrill Lynch to reduce its prediction to 2.9 percent from 3.7 percent this month.

‘Rare’ Intervention

The selloff sparked the first intervention from the central bank to prop up the zloty since it was made a free-floating currency in April 2000, causing the currency to surge as much as 3.2 percent against the euro on Sept. 23.

Central bank Governor Marek Belka called the intervention a “rare event” in an interview with PAP newswire yesterday. The zloty traded less than 0.1 percent stronger at 4.4170 per euro in Warsaw as of 4:47 p.m. in Warsaw and it retreated 1 percent to 3.2739 per dollar. The yield on government bonds maturing in October 2021 fell 5 basis point to 5.97 percent.

Belka said last week the zloty was getting out of sync with Poland’s “healthy fundamentals,” making it harder for policy makers to control inflation, according to his comments posted on Narodowy Bank Polski’s website.

The zloty’s implied volatility, which show how options contracts price the risk of further currency fluctuations, jumped to 27.35 today for one-month zloty versus dollar contracts, the highest level since May 2009.

Tusk’s Lead Narrows

Tusk is seeking to become the first Polish prime minister since the collapse of communism in 1989 to win a second term. Opinion polls show that while his Civic Platform remains the country’s most popular party, its lead has narrowed over the main opposition Law & Justice. Civic Platform slipped 2 percentage points to 33 percent and Law & Justice rose 4 percentage points to 26 percent, in a Sept. 15-18 survey by TNS OBOP, a Warsaw-based research company.

Law & Justice in its last stint in government in 2006 halted the sale of state-owned assets, sending revenue to the lowest level since 1992. Tusk’s Civic Platform raised 22 billion zloty ($6.5 billion) from the sale of assets last year, the most in a decade, according to Treasury Ministry’s website.

“Markets prefer a strong Civic Platform” in government, Anders Svendsen, an analyst at Nordea Bank AB in Copenhagen wrote in a report on Sept. 15. “A temporary negative market reaction is likely in case of a surprise.”

Resilience Through Crisis

Poland’s resilience as the only European Union economy to avoid a recession after the global credit crisis in 2008 spurred record purchases of the government’s bonds, with international investors increasing their holdings by 80.3 billion zloty to 147.2 billion zloty in the two years through July 2011, data on the Finance Ministry’s website show. The economy expanded an average 4.4 percent a year since Tusk came to power in 2007, compared with 0.1 percent in the EU.

Tax cuts and additional public spending to spur the growth has increased public debt to the highest level in at least two decades at 52.8 percent of gross domestic product, according to Polish accounting standards. Breaching 55 percent would trigger mandatory austerity measures.

Poland’s budget deficit has more than quadrupled since 2007 to 7.9 percent of GDP last year, the widest gap since at least 1996, according to data compiled by Bloomberg.

Tusk’s administration plans to reduce the budget shortfall to below 3 percent of GDP in 2012. Any deviation from the plans or reduction in revenue from slowing growth will endanger Poland’s credit rating, Piotr Kowalski, the head of Fitch Ratings in Warsaw, said in a Sept. 7 interview.

Budget Deficit Plan ‘Realistic’

The government’s plan to trim its deficit to 3 percent is “realistic,” Finance Minister Jacek Rostowski told reporters in Wroclaw, western Poland, on Sept. 16. The Finance Ministry doesn’t comment on moves in the currency “as a matter of policy,” spokeswoman Malgorzata Brzoza said by phone in response to questions from Bloomberg on Sept. 23.

The Finance Ministry is in a “denial phase,” Citigroup Inc. economists Piotr Kalisz and Cezary Chrapek wrote in a report, after meeting with government officials in Warsaw. The budget gap will climb to between 4 percent and 4.5 percent of GDP next year as the economy is unlikely to repeat its “stellar outperformance,” the analysts wrote on Sept. 13.

The International Monetary Fund cut its forecast for Polish growth to 3.8 percent this year and 3 percent in 2012 in a Sept. 20 report, citing concern an escalation of the euro region’s debt crisis “would undermine growth in emerging Europe.” The EU’s largest eastern economy gets 55 percent of its export revenue from the euro region, according to the statistics office in Warsaw.


Poland’s currency is 20 percent undervalued and may bounce back by yearend, Goldman’s Magdalena Polan said on Sept. 14, when the currency stood at 4.3992 per euro.

“The zloty has weakened on mostly external factors that don’t have much to do with the fundamentals which are fairly solid in Poland,” said Polan, a senior Europe economist in Warsaw. “The zloty will strengthen by the end of this year” as the government may “step up its sales of foreign currencies in the spot market.”

The Finance Ministry stepped in to defend the zloty at the end of last year by selling EU funds on the market through Bank Gospodarstwa Krajowego to prevent the zloty’s weakness from lifting foreign-denominated debt above legal limits. The state-owned lender also sold euros and dollars for zloty on the market on Sept. 23 and bought government bonds, said two traders involved in the transaction who declined to be named because the information isn’t public.

Credit Risk

Poland is feeling the brunt of the euro crisis partly because foreign lenders that risk losses on sovereign bonds including Greece’s control 66 percent of the country’s banking assets, according to the Warsaw-based financial regulator’s website. UniCredit SpA in Milan and Frankfurt-based Commerzbank AG control Poland’s second- and third-largest bank by assets, according to data compiled by Bloomberg.

Doubts that European policy makers can prevent a Greek default sent the credit risk on European banks and governments to all-time highs and pushed the euro to a six-month low against the dollar this month.

Poland’s credit-default swaps jumped to 202 basis points, or 2.02 percentage points, over the same contracts for Germany today, the widest gap since April 2009, from as little as 90 basis points in May this year, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Poland’s default swaps have more than doubled to 311 basis points from 151 on July 1. The contracts were at a “quite absurd” level, Deputy Finance Minister Dominik Radziwill said in on Sept. 2, when they traded at 227 basis points.

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