Intervention Option Demanded Amid Pension Revamp: Poland CreditPiotr Bujnicki and Maciej Onoszko
Poland must be ready to step into the zloty-bond market should a proposal to cancel government debt held by the nation’s pension funds be implemented, money managers at PKO TFI SA and Union Investment TFI SA said.
“In this scenario, we can expect less liquidity and more volatility,” Piotr Nowak, the Warsaw-based deputy head of fixed income at PKO Bank Polski SA’s mutual fund, with 12.2 billion zloty ($3.85 billion) of stocks and bonds under management, said by e-mail two days ago. The government “may need to be ready to intervene” in big sell-offs, he said.
Prime Minister Donald Tusk’s cabinet has outlined three options for overhauling the country’s pension system, including the cancellation of $39 billion in government bonds held by the privately run funds. While this solution cuts public debt, it would increase the share of outstanding bonds held by foreign investors to about 44 percent from 36 percent as of June 30, Finance Ministry data show. The government will decide on the reform next month.
Polish bonds have gained 1.4 percent since June 25 the day before government made its pension proposals, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. This compares with a 1.8 percent return on the debt of euro-region nations and 2.9 percent on Hungary’s bonds over the period, the data show.
Foreign investors cut their holdings in local-currency bonds by 2.6 percent from a month earlier to 201.9 billion zloty in June. The sell-off came after the U.S. Federal Reserve said on June 19 that it may reduce monthly bond purchases this year and phase them out by the middle of 2014. Overseas buyers resumed purchases in the last 20 days of July, the Finance Ministry said two weeks ago.
“Foreign investors may rule the market” after the pension-system overhaul, according to Dariusz Lasek, head of debt investments at Warsaw-based Union Investment TFI mutual fund, which has 7 billion zloty in assets. Either the central bank or state-owned Bank Gospodarstwa Krajowego, also known as BGK, could “stabilize” bond prices during turbulent periods, Lasek said by phone on Aug. 5.
The Finance Ministry didn’t respond to e-mailed questions from Bloomberg News. Anna Czyz, a spokeswoman at BGK, said by e-mail yesterday that questions sent to the bank would be answered by the Finance Ministry.
“The central bank has never intervened on the government bond market, even during the market turbulence caused by the collapse of Lehman Brothers and the outbreak of the global financial crisis in 2008 and 2009,” the central bank said today in an e-mailed response to questions from Bloomberg News. “Changes in the pension system should be conducted in a way that minimizes their influence on the financial markets.”
BGK has been active on Poland’s bond market in the past. Whether the central bank can intervene on the government bond market has been the subject of debate between the bank and the Finance Ministry.
“There’s no ban on the central bank buying government bonds on the secondary market,” Finance Minister Jacek Rostowski said in an interview with the Polish edition of Newsweek on Jan. 2, 2012. “If yields increased as a result of panic or contagion from an external virus, and not poor management of public finances, it might be expedient for the central bank to intervene.”
The Narodowy Bank Polski countered the view in a statement issued on the same day that its central goal is price stability and it “can’t replace the government, particularly on issues connected with public debt management.” Any public speculation on the central bank buying bonds may trigger an “unwanted perception” by financial markets, it said then.
In today’s statement, the central bank added that Poland’s constitution forbids purchases of government bonds on the primary market.
The central bank has avoided unconventional monetary policy measures, such as buying bonds from the Polish government, during the global financial crisis started in 2008.
“We haven’t needed to inject liquidity into the Polish banking sector; if there’s a problem, it’s sterilizing excess liquidity,” central bank Governor Marek Belka said in a July 24 speech to parliament. The central bank sold 127 billion zloty in seven-day bills at an auction on Aug. 9, the most since July 5, according to data compiled by Bloomberg.
As for possible central bank purchases of government bonds on the secondary market, Belka told lawmakers that they aren’t needed and would face the same sort of legal hurdles encountered by the European Central Bank’s yet-to-be-deployed unlimited bond-buying program. “It may not be illegal, but it would definitely be difficult,” Belka said last month.
The zloty lost 0.2 percent to 4.2056 against the euro at 4:53 p.m. in Warsaw today, paring this quarter’s gain to 2.9 percent, the best performance among 31 major currencies monitored by Bloomberg.
The premium demanded by investors to hold 10-year government bonds over similar German bunds rose five basis points, or 0.06 percentage point, to 247. The extra yield on Poland’s dollar bonds over Treasuries was little changed at 145, according to indexes compiled by JPMorgan Chase & Co.
BGK has “the operational scale and know-how to at least temporarily stabilize the market in case of an intense sell-off,” Pawel Golebiewski, a fund manager at BPH TFI SA mutual fund in Warsaw, which has 2.7 billion zloty in assets, said by phone yesterday. It could attempt to reduce yields by buying bonds or by intervening on the derivatives market, he said.
The Finance Ministry could also mitigate the pension overhaul’s negative impact by a gradual, drawn-out cancellation of the bonds, Golebiewski said.
“As a rule, you can’t buck the market,” Michal Jochymek, senior central and eastern Europe fixed-income trader at BNP Paribas SA in Warsaw, said in an e-mail yesterday. “What you can try to do is mitigate short-term volatility.”