Investors vote for growth as Polish bond yields fall below Czech

By bne IntelliNews October 26, 2012

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They've both been tightening in recent months as investors look for non-Eurozone debt, but Polish borrowing costs in euros fell below the Czech Republic's for the first time on October 25, as political risk rises in Prague and investors favour Warsaw's focus on growth over strict austerity.

Yields on Poland's 10-year Eurobonds fell 1 basis point (bp) below those on similar Czech notes for the first time on record on October 25, according to data compiled by Bloomberg. That's no mean tightening of the spread given that Poland was paying a premium of 47bp just two months ago.

Even though Polish growth is slowing, the economy still expanded by 2.3% in the second quarter, while its higher-rated neighbour's economy has been in contraction since the last quarter of 2011.

While Prague is trying to push through more austerity measures in a bid to protect its record low borrowing costs, analysts have started to worry that it is going too far, and that the government's tight fiscal policies - for so long making it a darling of investors - are now helping keep the country in recession. In addition, the latest attempt to push through tax hikes is at the centre of a political crisis that threatens to bring down the coalition government.

By way of contrast, six weeks ago the Polish government relaxed plans to cut the budget deficit this year and next, to allow more spending to stimulate the economy instead. "The priority is to maintain economic growth," Polish Prime Minister Donald Tusk said on October 12. "We should be determined to maintain this positive growth rate, even at a lower level than in the recent years, regardless of the cost."

Tusk announced a PLN300bn off-budget investment plan designed to create jobs and protect growth, while still keeping Poland on the path of decreasing budget deficits and state debt.

Polish local currency bonds of one year or longer have returned 18% in euro terms this year, compared with a 14% advance by Czech koruna bonds and an 9% average from Eurozone government bonds, indices from the European Federation of Financial Analysts Societies and Bloomberg show.

While yields on Polish 10-year zloty bonds have fallen 1.4 percentage points this year to 4.49%, the equivalent Czech yields in koruna decreased 1.44 percentage points to 2.15%, helped by record-low interest rates from Prague's policymakers.

"The Polish government has recently scaled back planned fiscal consolidation," Danske Bank wrote on October 15. "This is hardly positive from an investor perspective, but in our view it is not jeopardizing fiscal sustainability." Poland is rated 'A2' by Moody's Investors Service, the fifth-lowest investment grade and one below the Czech Republic.

The extra yield investors demand to hold Polish dollar-denominated bonds rather than US Treasuries fell 6bp, or 0.06 percentage point, to 116 at 11:00am in Warsaw, indices compiled by JPMorgan Chase & Co. show.

The spread between Poland's 10-year zloty bond and German bunds narrowed 6bp to 289bp on October 25, data compiled by Bloomberg show. The zloty strengthened 0.3% to 4.1445 against the euro, extending this year's gains to 7.8%.

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