Greece Fear Mongering in Poland Tarnishes Bonds Before Election

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Investors say lavish spending promises backed by unrealistic tax revenue projections are reason to avoid Polish bonds in the run-up to parliamentary elections.

Pledges by the party leading polls to boost social spending by $10 billion and pay for it with higher taxes on banks and retailers and more efficient collection prompted the government to warn Poland risked repeating the mistakes of Greece. Polish yields surged to a 10-month high last week after government bonds underperformed most regional emerging-market peers.

While the European Union’s biggest eastern nation has constitutional curbs to prevent a budget blowout, investors are concerned Law & Justice’s spending plans would drive up borrowing and the levy on banks would damage sentiment.

“We will price in more bad news as we move closer to election and polls confirm Law & Justice’s dominance,” Viktor Szabo, a fund manager who helps oversee $12 billion of developing-nation debt at Aberdeen Asset Management in London, said by e-mail on Tuesday. “In the short run you can get away with many things, such as increasing taxes where you see profits, but these sectors will stop investing and there will be less to tap in the future.”

Szabo said he’s holding fewer Polish bonds than the proportion in benchmark indexes.

Credibility Concern

Law & Justice has pledged to boost child benefits, lower the retirement age and offer higher tax-free allowances if it wins power. Beata Szydlo, the party’s candidate for prime minister, said on Saturday her party plans to increase budget revenue by 73 billion zloty ($19 billion), including 8 billion zloty from new taxes on banks and large supermarket chains.

There’s “concern about the credibility of its estimates,” Rafal Benecki, an economist for Poland at ING Groep NV in Warsaw, said in an e-mailed research note on Monday. “It will need to be brought back to reality after the election.”

Polish bonds have lost 6.5 percent in dollar terms since the end of January, the fourth-worst performance among 11 regional emerging-market peers, according to data compiled by Bloomberg. The fifth month of losses marked the longest losing streak since at least 1999. The yield on Poland’s 10-year bonds jumped 115 basis points in the period to 3.13 percent at 8:55 a.m. in Warsaw. The spread over German bunds at 249 basis points is near the highest in more than a year.

Debt Limits

Poland’s fiscal rule prevents excessive spending increases and public debt is limited to 60 percent of gross domestic product. Still, that leaves room for a new government to increase borrowing after debt dropped to 47.8 percent of GDP from 53.1 percent in 2013, according to the Finance Ministry. Poland got a reprieve from EU budget monitoring after reducing its fiscal deficit to near the bloc’s 3 percent of GDP limit last year from as much as 7.8 percent in 2010.

Law & Justice leads the Civic Platform by 33 percent to 26 percent, according to a survey by pollster IBRIS conducted ahead of the parliamentary election that will take place in the fall.

“Changes on the local political scene are so rapid that there’s no point in anticipating election results just yet,” Krzysztof Madej, the head of debt at Altus TFI SA in Warsaw, whose funds have 5.5 billion zloty in assets, said by e-mail on Tuesday. “Greece is the No. 1 theme now.”

The zloty fell to its weakest against the euro since February on Wednesday as European leaders set a Sunday deadline for Greece to accept a rescue, saying otherwise they’ll take the unprecedented step of propelling the country out of the euro area.

“Short term there is upside potential should the Greek situation resolve,” Endriko Vorklaev, a money manager helping oversee the equivalent of $60 million in eastern European bonds at a unit of SEB Asset Management in Tallinn, said by e-mail on Tuesday. Even so, he’s considering cutting his holdings of Polish bonds before the election. “I’m afraid that more autumn election promises could hit the news wires and hurt the prospects of sovereign finances.”

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