Poland's $41 Billion Bond Investors at Risk From New Asset Tax

  • Local banks seen jettisoning bonds targeted under proposal
  • Prime minister urges lawmakers to vote in bill for `citizens'

By taxing banks’ assets, Poland’s new government risks losing its biggest local investors.

The Law & Justice party’s planned 5 billion zloty ($1.3 billion) levy may force lenders to sidestep risks to their profits by shunning investments in bonds and loans hit by the tax. The withdrawal of banks threatens to sap East Europe’s biggest bond market of local dealers, making it more dependent on foreigners.

“They may limit their bond trading activities to avoid blowing up their assets,” Marcin Dabek, deputy head of global markets at Societe Generale SA in Warsaw, said by e-mail. “That will definitely harm the secondary debt market, will reduce its liquidity and may impact demand for new issuance.”

Law & Justice, which came to power in October, will use the 0.39 percent charge on bank assets above 4 billion zloty to help fund social spending pledges including new child benefits. In an interview with Bloomberg this week, Finance Minister Pawel Szalamacha sought to allay investor concerns that have pushed up the yield on Poland’s 10-year zloty notes by 30 basis points since the election.

The new tax bill, which was discussed in parliament Wednesday, will have “negative implications” for the industry and the broader economy by slowing loan growth and crimping profits, Deutsche Bank AG said earlier this month. The proposal has also provoked criticism from the central bank which cited concern about additional restraints on lending as global regulators place higher capital requirements on the industry. The tax may take effect as soon as in February.

Prime Minister Beata Szydlo appealed on Wednesday to lawmakers to pass the bill, saying it is a choice between standing “by citizens’ interests” or by those “of lobbies and corporations.”

Polish banks became the second-largest investors in zloty debt after foreign buyers following a pension overhaul in 2014 that banned retirement funds from buying state-issued securities. They held 162 billion zloty in local notes, a third of all the securities outstanding, Finance Ministry data show.

Government securities accounted for 10 percent of Polish bank assets. Net income for the industry fell 21 percent to 11.4 billion zloty in the first 10 months of the year, compared with the same period in 2014, data from the financial regulator show.

During Wednesday’s session in parliament, Deputy Finance Minister Konrad Raczkowski said banks concerned about buying bonds should remember the tax doesn’t apply to the first 4 billion zloty of assets on their books.

It may be hard for the government to make up the lost demand from local lenders, according to Rafal Benecki, chief economist at ING Bank Slaski SA in Warsaw. Three-quarters of this year’s borrowing needs were met by Polish banks, he said.

“That may be an issue,” Benecki said Monday. “The state needs to borrow more next year.”

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