Scandal Chapter II Spurs Poland Rally as Tusk Fights Back

Investors in Polish bonds are signaling support for Prime Minister Donald Tusk after the latest release of secretly taped political conversations sparked the biggest rally in emerging markets.

The yield on the October 2023 zloty note fell 10 basis points to 3.49 percent after dropping six basis points yesterday, the most among 24 developing country local-currency notes tracked by Bloomberg for the second day. The rate extended its decline after Tusk said yesterday he would not allow politics to be dictated by a group of “organized criminals,” who secretly recorded conversations of several ministers as well as central bank Governor Marek Belka.

While the zloty and bonds slumped last week amid opposition calls for early elections after the publication of the discussions between Polish politicians, the rebound indicates the ruling party may avoid this scenario as long as no more compromising tapes are published, according to Henrik Gullberg, a foreign-exchange strategist at Deutsche Bank AG in London. As markets rallied yesterday after publication of the latest recordings Tusk fought back, saying he won’t “punish” politicians for comments made in private conversations and the scandal appeared to be aimed at “paralyzing” the government.

‘No Incentive’

“There’s no incentive for Tusk to favor an early election,” Gullberg said by e-mail yesterday. “Tapes are obviously damaging, but so far not enough to trigger a government change.”

Wprost magazine released tapes on June 14 of Belka talking with Interior Minister Bartlomiej Sienkiewicz over dinner about boosting the economy to help the government win elections, not due until 2015. More tapes emerged over the weekend, including one that featured Foreign Minister Radoslaw Sikorski purportedly questioning the value of the country’s alliance with the U.S. Gullberg said it’s a “little too early” to buy the zloty as more tapes could leak out in coming days and weeks.

The opposition has called on Tusk to resign and end his party’s seven-year rule, the longest stretch of political stability since communism ended 25 years ago. The scandal increased the extra yield investors demand to hold Poland’s 10-year zloty notes over similar German bunds to 231 basis points last week, from a 12-month low of 213 set on June 9. The spread narrowed to 218 basis points today.

‘Biggest Scandal’

“There is no doubt that this is the biggest scandal in Polish politics in years,” Lars Christensen, chief emerging-markets analyst at Danske Bank A/S, said in a note yesterday. Support for Tusk’s governing Civic Platform party is likely to “drop markedly,” he wrote.

The Civic Platform, with 24 percent support, trailed the opposition Law & Justice by 7 percentage points in a TNS Polska poll of 1,000 adults carried out yesterday and published by broadcaster TVP Info today, the first survey conducted since the tape scandal broke. The margin of error was 3.1 percent, the pollster said.

Tusk’s coalition controls 234 votes in the 460-seat Sejm, or lower house of parliament. A two-thirds majority, or 307 votes, is required to dissolve the legislature, making the ruling party’s support necessary. The Law & Justice party, the biggest opposition group, commands 133 votes in the assembly.

The zloty gained 0.2 percent to 4.1525 against the euro at 2:19 p.m. in Warsaw, advancing for a second day after slumping 1.2 percent last week. The currency has declined 0.2 percent this month.

‘Some Risk’

Goldman Sachs Inc. revised its forecast for the zloty to 4.15 against the euro over the next three months from 4.20 seen earlier as the currency benefits from easing by the European Central Bank, economist Magdalena Polan said in a research note on June 20. She said there is “some risk” of a snap ballot, which would weaken the zloty, bonds and credit-default swaps.

“Poland is in a strong position to withstand this, but early elections can be viewed negatively by markets,” according to Clemens Hansmann, a money manager at Gutmann Kapitalanlage AG in Vienna, which has 6 billion euros ($8.2 billion) of assets under management. “Until now the market reaction on the tape scandal has been subdued,” he said by e-mail yesterday.

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