CDS Lowest Since Lehman Show Economy Comes of Age: Poland Credit

Investors are paying the least to insure Polish debt since Lehman Brothers Holdings Inc. collapsed 5 1/2 years ago as economic growth accelerates and the nation plays a leading role in responding to the crisis in Ukraine.

The cost of five-year credit-default swaps, which protect a bondholder should the borrower renege, slid to 62 basis points at 10:52 a.m. in Warsaw, the least since September 2008, the month Lehman declared bankruptcy, according to data compiled by Bloomberg. A report last week showed the economy grew at the fastest pace in two years in the first quarter even as the conflict in neighboring Ukraine heightened regional tensions.

“Poland’s economic fundamentals are improving and it’s clear investors differentiate it from other countries in the region,” Jacek Wieclawski, a fixed-income and derivatives trader at Rabobank International in London, said by e-mail yesterday. “Politically, Poland has grown through its decisive and effective policy toward Ukraine. It has become a partner to western European nations.”

With Prime Minister Donald Tusk’s proposal to build a Europe-wide energy union to break Russia’s grip over gas supplies and calls for solidarity toward Ukraine, the country has taken center stage in European Union diplomacy for the first time since joining the bloc a decade ago. Poland has become “something of a sweet spot in terms of political risks, and macro trends and prospects,” Tim Ash, an emerging-market strategist at Standard Bank Plc, wrote in a note on May 16.

Fewer Sales

The cost of Polish CDS is four basis points above South Korea’s, rated two levels higher at Moody’s Investors Service, and three basis points lower than neighboring euro-member Slovakia, the data show. The extra yield on Poland’s dollar bonds over Treasuries fell one basis point to 100 basis points, after reaching an five-year low last week, JPMorgan Chase & Co. indexes show.

Poland’s gross domestic product expanded 3.3 percent in the first three months of 2014 from the same period last year, accelerating for the fourth quarter running, the statistics office said May 15, a day after reporting inflation slowed to 0.3 percent in April. An overhaul of pensions this year reduced public debt relative to GDP as country pushes ahead with fully funding this year’s borrowing needs by the end of July.

“Increasing gross domestic product translates into fewer bond issues and easier debt management,” Jakub Taborowicz, who helps manage 24.5 billion zloty ($7.7 billion) at PZU TFI SA, Poland’s largest mutual fund, said by e-mail yesterday. “While low inflation reduces the risk of the debt losing value.”

Weaker Trade

The nation’s growth prospects may be hindered by slowing industrial production, which “may disappoint” after being hurt by ailing coal production and weaker trade with Russia and Ukraine, economists at ING Groep NV’s Polish unit, led by Rafal Benecki, wrote in a note yesterday.

Yields on Poland’s 10-year government bonds rose four basis points 3.84 percent, extending the spread over similar German bonds to 250 basis points. The zloty slipped less than 0.1 percent to 4.1906 against the euro at 10:51 a.m. in Warsaw, increasing this quarter’s loss to 0.6 percent.

Russia is being pulled into a new Cold War with the U.S. and its allies, who are using economic warfare reminiscent of the Soviet Union under Leonid Brezhnev, Russian Prime Minister Dmitry Medvedev said yesterday in an interview with Bloomberg Television. Russia has prepared a raft of retaliatory steps in response to potentially wider sanctions imposed by the U.S. and the European Union, Medvedev said.

Tusk is showing “strong leadership” and Poland has played a “central role” responding to the conflict in Ukraine, NATO Secretary General Anders Fogh Rasmussen said May 8.

“Poland’s recent initiatives to resolve the Ukraine crisis has won it friends and a place in the EU premier league of decision-making countries,” Standard Bank’s Ash said.

Before it's here, it's on the Bloomberg Terminal.