Wednesday, 2 February 2011

Financial Institutions Threaten Poland

'The Polish government does not have a credible plan to solve Poland's public finances'

These were the words of the economist responsible for developing markets from Barclays Bank last week. As when any such statement is made the words were deliberate and meant to place external pressure upon the Polish government to enact policies in line with the wishes of the financial markets. Barclays Bank has recommended that its clients buy Polish Credit Default Swaps (CDS). These instruments tend to rise in value when investors suspect that a government may face public finance problems.

Barclays has not been alone in warning of impending financial problems in Poland. Earlier the senior director from the emerging Europe team from the Fitch Ratings agency had warned that if Poland does not reduce its public deficit then it would not maintain its current ratings position.

The question is why are such institutions targetting Poland? The country currently is enjoying one of the highest growth rates in Europe. Its budget deficit is high (7.2%), but far below many other European countries (including healthy economies such as Norway) and only 0.4% above the EU average. Furthermore its level of public debt (53%) is over 20 pecentage points below the European average.

The answer to this question is that the financial markets - backed up by the usual suspects in Poland - are opposed to the government's recent decision to reduce the payments going to the private pension schemes. It is estimated that this will save the government Zł24bn this year and Zł26bn in 2012. This has meant that the PO government has delayed the spending cuts that the international markets are demanding until after the parliamentary elections later this year.

The irresponsibilty of these external advisors is breathtaking when it is considered that public spending combined with EU funds has been responsible for keeping the Polish economy growing over the past couple of years. The recent figures released by the Polish Statistics Agency for 2010 have shown that private investment has remained stagnant throughout the year. In order for Poland to retain its positive economic growth then it is imperitive that it maintains its public spending, particularly as it needs to absorb as much of its allocated funds from the present EU budget that runs out in 2013.

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