• Bonds rally as securities held by banks not subject to new tax
  • Inflows from levy reduced 8.3 percent to 4.4 billion zloty

Poland’s ruling party softened a tax on its financial industry which could have hurt its ability to finance the budget deficit, helping to rally government bonds on Tuesday.

Parliament’s public finance committee excluded banks’ roughly $41 billion in government- bond holdings from taxable assets “to prevent an increase in budget-financing costs,” Law & Justice lawmaker Wieslaw Janczyk, a deputy head of the committee, told reporters. The levy, set to be passed by legislators this week, will bring 4.4 billion zloty ($1.1 billion) per year to the budget, 400 million zloty less than earlier envisaged, according to Deputy Finance Minister Konrad Raczkowski.

Law & Justice won this year’s presidential and parliamentary elections on a pledge to increases taxes on financial institutions to fund more social spending, leading to the biggest drop in the valuations of Warsaw-listed banks since 2008. Critics including Poland’s Banking Association have said the levy could stun credit growth and before Tuesday’s revision reduced the rationale for banks to buy government bonds.

“It’s a voice of common sense,” said Jaroslaw Janecki, the Warsaw-based chief economist at Societe Generale SA’s unit in Poland. “It suggests that the Finance Ministry saw risks of taxing investors who buy Polish debt.”

Bonds Advance

Local-currency bond prices increased in light holiday-season trading, driving down the yield on two-year notes 10 basis points to 1.69 percent at 2:10 p.m. in Warsaw, the lowest since Dec. 8. The rate on the government’s benchmark five-year securities fell six basis points to 2.22 percent. The zloty gained 0.2 percent to the euro on Tuesday, the best performance among 24 emerging market currencies following the Chilean peso and Brazilian real.

“The market’s positive reaction shows that there was a risk of the tax in the price of debt, which would mean not only higher borrowing costs but also pose a threat” to banks who buy securities from the government, SocGen’s Janecki said.

Warsaw’s WIGBank index gained 0.3 percent, paring its 2015 loss to 23 percent, on course for the biggest annual decline in seven years, according to data compiled by Bloomberg. The country’s WIG20 gauge of the biggest and most-liquid stocks dropped 18 percent. The planned annual budget revenue from the new levy amounts to 29 percent of Polish banks’ profit in the 12 months to Oct. 31, data from the Polish Financial Regulator show.

Law & Justice’s Janczyk said that to partly compensate the budget for the exclusion of government bonds, his party decided to raise the tax rate on bank assets to 0.44 percent per year from 0.39 percent. Insurers will be subject to the same levy but will include government bond holdings in their taxable assets, he said.

Raczkowski said PKO Bank Polski SA, the nation’s largest lender, will pay an estimated 870 million zloty in additional tax next year, while biggest insurer PZU SA an extra 150 million zloty.

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