Poland claims it's ready for market turmoil

By bne IntelliNews June 21, 2013

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With chaos reigning across emerging markets in the wake of the US Federal Reserve's suggestion that it could stop printing money soon, the Polish finance ministry jumped in to try to talk up its debt, insisting that it is well prepared to meet any market turmoil. Analysts are not so sure however, pointing the finger at the hawkish central bank.

Speaking to a parliamentary committee on June 20, according to cbonds, Deputy Finance Minister Wojciech Kowalczyk said: "At present we have 88% of this year's borrowing needs financed. Most probably, as far as debt auctions in July and August are concerned, they will be conditional, which means they may not happen at all."

Ben Bernanke, chairman of the Fed, surprised on June 19 when he said the central bank may reduce its bond purchases later this year should the economy strengthen, and end the quantitative easing programme in mid-2014 if there's sustainable growth. The market had expected a more dovish message, given the recent turbulence prompted by a similar comment in May. The emerging markets were the first victims of the suggestion of an end to the huge volume of liquidity stalking global markets, with currencies and equities tumbling, and bond yields spiking, across Central and Eastern Europe on June 20

Kowalczyk was clearly seeking to underline Warsaw's claims that Poland is better prepared than most. Poland "is in a very comfortable situation, and has been prepared for such volatility," he claimed. He added that the current situation is caused by external factors that Poland has no control over, and that the best the country can do is to "try to predict [such external factors] and be ready for them."

Poland was one of two countries in the region to go against the grain, calling Bernanke's stance correctly and rushing through debt sales ahead of his scheduled statement. Warsaw sold PLN7.8bn (€1.8bn) of a two-year zero-coupon paper in a switching auction on June 19. Demand hit PLN9.1bn for the tranche, which redeemed PLN7.2bn in treasury paper maturing in July and October, reports cbonds. The previous day Slovakia sold JPY29.8bn in Samurai bonds, the first international debt issue out of the region in June.

"We are dealing at present with a huge turmoil," Kowalczyk continued. "The global market is trying to price in this new risk, which has not been priced in to such an extent [and] we are dealing with immense volatility."

Vulnerabilities

Despite the finance ministry's claims, some see the zloty as one of the most vulnerable assets in the emerging market space. Dankse Bank believes that, "the real drag on the currency seems to be carry erosion ... The reason for this is simple: G3 bond yields are going up led by US yields, while a weak Polish economy continues to push down Polish rates and yields."

In other words, the analysts suggest, the problem is that the National Bank of Poland is out of step. That's certainly an argument many government ministers would agree with, having been infuriated over the last 12 months or so with the hawkish stance of the central bank.

"The sell-off in the zloty is really about relative monetary policy," the Danske analysts continue. "[T]he Federal Reserve is moving closer to scaling back quantitative easing, while more and more rate cuts from the Polish central bank are being priced in. We have a hard time seeing that changing in the near future so the pressure on the zloty looks set to continue for some time. In that respect, it should be noted that we now see a real risk of deflation in Poland in the next six months. Therefore, the NBP simply will have to keep cutting interest rates. Put another way: for the NBP, it is a choice between a deeper crisis and deflation or a weaker zloty."

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