Ring-Fenced Greek Risk Is Opportunity for Beat-Up Polish Bonds

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Heading for an unprecedented fifth month of losses, Poland’s bonds are starting to look cheap to those investors who say the nation is more protected from Greek risk.

Union Investment Privatfonds GmbH and Aberdeen Asset Management Plc say contagion from Greece is lower than in 2011 as Europe has largely ring fenced its banks and there are fewer economic links. Four years ago, the Greek crisis stoked outflows from emerging Europe, especially from countries with current-account deficits like Poland, which now runs a surplus.

Polish bonds have rebounded after yields on benchmark 10-year notes surged to a 10-month high of 3.32 percent on June 17, even as European leaders wrangled over a bailout for Greece. The rate, which stood at 3.20 percent at 5:20 p.m. in Warsaw, has increased from a record low 1.98 percent on Jan. 30, prompting holders such as Union Investment’s Dmitri Barinov to start reducing his “underweight” position in the debt.

“Poland is absolutely immune,” Frankfurt-based Barinov, who helps oversee $2.6 billion of assets as a money manager, said by e-mail on Wednesday. He’s bullish on the zloty and if 10-year yields spike to 3.5 percent, Barinov said he’s switching to an “outright long” stance, holding more Polish bonds than indicated by indexes.

Investors have lost 3.5 percent holding Poland’s bonds since the end of January, compared with a 1.8 percent decline on Hungary’s notes, according to indexes compiled by Bloomberg.

Greek Trigger

European Union leaders arrive for a two-day summit in Brussels on Thursday to discuss a deal to keep Greece afloat as its bailout expires at the end of this month and about 1.5 billion euros ($1.7 billion) in payments to the International Monetary Fund fall due on June 30.

Greece’s potential withdrawal from the euro wouldn’t be a “Lehman-type event” for Poland and east Europe’s other debt markets, as “it’s been on the radar screens for so long and and so much has been done to ring-fence the European banking sector,” Viktor Szabo, a London-based fund manager at Aberdeen, which oversees $12 billion of developing-nation debt, said by e-mail on June 24.

Schroder Investment Management Ltd. remains underweight on Polish bonds and doesn’t see valuations as “particularly attractive,” especially with Greece’s future uncertain.

Internal Demand

“Were there to be a Grexit, no one would be safe,” James Barrineau, the New-York based co-head of emerging-market debt at Schroder, said by phone on June 23. “But because Poland is one of the best run, highly-rated countries in central Europe, it’ll probably be a little less affected.”

The EU’s largest eastern economy is on track for its first annual current-account surplus in at least 20 years, according to PKO Bank Polski SA. It’s set to expand 3.8 percent this year, the fastest pace in four years, central bank management board member Andrzej Raczko said on June 23.

Poland sold 2.1 billion zloty ($565 million) of bonds at a switching auction on Thursday, the least at such a sale since December 2012, according to Finance Ministry data.

The economy is “very stable, balanced and based mostly on internal demand, not inflows of capital from abroad, which means that our banks and public finances are safe,” Prime Minister Ewa Kopacz said on June 22. The zloty could “paradoxically” rise if Greece leaves the euro, central bank Governor Marek Belka said a day later.

“Given the declining exposure over the past years, trade links with Greece pose marginal risks to the region,” Roxana Hulea, a London-based emerging-market strategist at Societe Generale SA, said in a research note June 24. “We are comfortable with increasing exposure to the low-beta credits,” she said, referring to less volatile Eurobonds such as Poland’s.

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