Secret Tapes Cast Doubt on Polish Central Banker Future

Poland’s currency weakened the most in three months as a leaked recording sparked concerns over Governor Marek Belka’s future and spurred the prime minister to call a news conference today to address the matter.

The zloty weakened 0.6 percent to 4.1425 per euro at 1:13 p.m. in Warsaw, and earlier fell as much as 0.8 percent. Belka said yesterday he “regrets” language he used during a secretly taped 2013 conversation with Interior Minister Bartlomiej Sienkiewicz, published by the Wprost magazine two days ago, which also sparked calls for Premier Donald Tusk to quit.

Belka said in a statement yesterday that he never broke the law and that the recording was “manipulated” to suggest “an instance of the central bank governor exceeding his powers, which never took place.” Tusk is scheduled to hold a news conference on the “unpleasant case” at 3 p.m. in Warsaw, he said on Twitter.

“If true, this is damaging to Belka and undermines the independence of the central bank,” Tim Ash, chief emerging-market economist at Standard Bank Group Ltd. in London, said by e-mail yesterday. “The question would be whether this makes Belka’s position untenable?”

On the leaked tape, which Wprost said was recorded in July 2013, Sienkiewicz is heard asking Belka whether the central bank would be able to help the government support the economy before next year’s election if weak growth and budget inflows coincide with a surge in support for opposition Law and Justice party.

‘Grim Reading’

Belka is heard replying that he would be ready to “play ball” with the rate-setting Monetary Policy Council if Finance Minister Jacek Rostowski is replaced by a “technical and apolitical” figure. Tusk picked Mateusz Szczurek, an economist at ING Groep NV with no political experience, to replace Rostowski in November.

“It makes for quite a grim reading, but the idea that monetary policy is anything other than price stability is very negative in the medium-term and there will have to be some accounting for this,” Paul McNamara, investment director at GAM U.K. Ltd., which manages $129 billion in assets, said by phone from London yesterday. “In terms of immediate impact on the market, I’d guess it’s going to be negative for the zloty but not in a major or sustained way.”

The yield on Poland’s benchmark two-year notes jumped nine basis points to 2.61 percent today after falling to a record low this month. The rate has declined from as much as 3.25 percent on Jan. 31, data compiled by Bloomberg show.

Council Relations

The benchmark WIG30 Index slid 1.3 percent, led by state-controlled companies including chemical producer Grupa Azoty SA and coal group Jastrzebska Spolka Weglowa SA.

On the tape, Belka also hurls insults at the 10-member Monetary Policy Council, especially at Jerzy Hausner. That threatens to “irrevocably damage his relationship” with the panel that sets interest rates and has some oversight over central bank accounts, according to Michal Dybula, chief economist for central and eastern Europe at BNP Paribas SA.

“This doesn’t look good for the central bank governor,” Dybula said by phone from Warsaw yesterday. “In the worst case, this may end badly for Belka, because we are talking about an independent central bank governor lending his support to one side of the political divide. This might be the basis for putting him in front of the State Tribunal.”

‘Too Far’

The comments are “unfair and disrespectful” to the rate-setting council, policy maker Andrzej Kazmierczak said today by phone. Belka will be asked for explanations at the council working meeting tomorrow, he and another rate-setter, Elzbieta Chojna-Duch, said.

While the governor “went too far” with his proposals in the conversation with Sienkiewicz, he didn’t break any laws, Chojna-Duch said in Polsat News television today.

The transcript on Wprost’s website shows Belka allegedly discussing options for the central bank to buy government bonds in an emergency situation by providing liquidity to state-owned lender BGK and state-controlled PKO Bank Polski SA.

“I simply must have instruments, for example, to get around the Monetary Policy Council,” said Belka, according to Wprost. It would be best not to resort to bond buying by the central bank because of the “huge” difficulty in returning to normal debt sales afterward, he was cited as saying.

The government’s agenda shows the cabinet will discuss amendments to the central bank law, including allowing the central bank to buy bonds on the secondary market outside of open-market operations, at its June 17 meeting.

‘Blatant Violation’

The bank is required to cooperate with the government on economic policy as long as it doesn’t compromise its constitutional duty to protect the currency. At the same time, the governor can’t belong to a political party or engage in public activities that can’t be reconciled with “the dignity of his office,” according to the constitution.

The tapes show a “blatant violation” of central bank’s autonomy, former Finance Minister and central bank Governor Leszek Balcerowicz said on Radio Tok FM today.

Belka didn’t breach the bank’s independence as it’s obliged by the law “to cooperate with the government in supporting economic growth,” Warsaw Mayor Hanna Gronkiewicz-Waltz, told reporters today. She’s a former central bank governor and the current deputy head of the ruling Civic Platform.

‘Serious Crisis’

Polish President Bronislaw Komorowski, who appointed Belka for a six-year term in June 2010, said the leaked recordings show a “serious crisis of state institutions,” Gazeta Wyborcza said yesterday on its website, citing Joanna Trzaska-Wieczorek, his spokeswoman. The president is awaiting explanations from Tusk and Belka, she told Gazeta.

Belka will ask for the president’s assessment of the situation before deciding whether he should resign, Gazeta reported, without saying where it got the information. Przemyslaw Kuk, a spokesman for the central bank, declined to comment.

Jaroslaw Kaczynski, the leader of the Law and Justice opposition party, said he expects Tusk to announce his resignation at today’s news conference. Otherwise, his party, which has 136 of 460 deputies in the lower house of parliament, will call a vote of confidence in the government as “the law was broken,” he said.

“This government is unable to ensure safety nor is it able to act in Poland’s interest,” Kaczynski said at the news conference in Warsaw. “We have every reason to believe that this government needs to go.”

Confidence Motion

Kaczynski said he’d consult with other parties about a candidate for prime minister. General elections aren’t scheduled until next year.

Parliament may dismiss the cabinet if it musters at least 231 votes with a motion indicating the name of the new prime minister, according to constitution. The ruling coalition of the Civic Platform and the Polish Peasants Party has 234 votes in the chamber.

The crisis at the central bank comes as policy makers are weighing whether to resume interest-rate cuts after inflation slowed to 0.2 percent in May, matching a record low. While Belka said June 3 that he “wouldn’t exclude” easing, other policy makers, including Jan Winiecki and Kazmierczak, say it’s not needed after the economy expanded at its fastest pace since 2012 in the first quarter.

Rate Expectations

Forward-rate agreements, contracts used to bet on interest rates, showed a quarter-point reduction in the central bank’s 2.5 percent reference rate within three months, data compiled by Bloomberg on June 13 show. JPMorgan Chase & Co. forecast a 50 basis-point reduction in the benchmark rate, “most likely” in September, according to a note by Nora Szentivanyi, an economist for central and eastern Europe, published the same day.

The scandal may also sway the deliberations of policy makers, according to Krzysztof Izdebski, a fixed-income money manager at mutual fund Union Investment TFI in Warsaw.

“Potential rate cuts are now less probable, as they may be interpreted as giving a helping hand to the government,” Izdebski, whose company has $2.8 billion in assets, said yesterday by phone.

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