Poland finds IMF's new flexible credit line removes stigma of applying for aid

By bne IntelliNews April 20, 2009

Jan Cienski in Warsaw -

When Jacek Rostowski, Poland's finance minister, turned to the International Monetary Fund in mid-April with an application for one of the its new flexible-credit facilities worth $20.5bn, the step was, paradoxically, seen as a sign of Poland's strength and not of its weakness - the usual response to turning to the Fund. Bulgaria could be next.

The IMF has already been very active in Central and Eastern Europe, with Hungary, Ukraine, Serbia, Latvia and Romania all asking it for help. Until now, the thought of more stable countries turning to it has been anathema, something this new Flexible Credit Line (FCL) has been designed to address by removing the perception problem in the markets that all countries turning to the IMF are on the verge of collapse.

Ever since the economic crisis hit emerging Europe, Poland has been battling the idea it's in anything like the dire situation of the region's basket cases. But that line of argument has, until recently, done little to hold up the zloty, which lost more than 30% of its value earlier this year in line with currencies like the Hungarian forint and the Czech koruna. "I think that accessing this IMF credit line, which should take place shortly, should significantly help us in that area [of stabilising the zloty]," Rostowski said in a radio interview. "Having access to the credit line improves a fundamental problem which we have had and which caused nervousness on the part of investors and normal people, that there was no certainty that if needed, the zloty would be backed by billions."

Analysts say that Poland's problem is not that it's as indebted as its neighbours; rather, the main concern is that its foreign exchange reserves are comparatively small. This makes it an ideal candidate for this new type of IMF funding, which is designed to strengthen countries that are fundamentally sound, but which could face an unexpected shock due to the extreme conditions of the crisis. Poland is the second country to seek access to the credit line after Mexico.

"Once a [flexible] credit line has been approved, a country can draw on it without having to meet specified policy goals, ie. no conditionality and no phasing of disbursements. This differentiates the FCL from traditional IMF loans such as those given to Iceland, Hungary, Latvia, Ukraine and Serbia. Hence, Poland continues to differentiate itself as one of the more robust economies in Central Europe, despite having some type of 'relationship' with the IMF," says Christian Keller, an emerging markets economist with Barclay's Capital.

Indeed, when other CEE countries have turned to the IMF for more conventional forms of help recently, they were swiftly punished by the markets. But in Poland's case, the zloty surged 3% in the two days following Rostowsky's announcement of the IMF plan.

One size fits nobody

The positive response from the markets is a sign that the drumbeating on Poland's behalf is finally paying off. The desire to be seen as dissimilar from the rest of the region has caused some policy contortions in Warsaw. When Hungary recently asked the EU for an aid package for the whole of Central Europe, and for an easing of the requirements for joining the euro, Poland wouldn't go along, despite worries about embarrassing a regional ally. Warsaw has been adamant that the country is healthy enough to deal with the crisis and needs no special treatment.

In a recent interview, Rostowski pointed out that Poland is actually doing better than many economies in Western Europe. "A one-size-fits-all approach to the region is not right," he told bne. "Countries should be helped in accordance with their needs, whether they are in Eastern or in Western Europe, whether they are in the Eurozone or not."

At least two Eurozone economies, Ireland and Greece, are in significantly worse shape than Poland and another large country, Spain, is in similar straits. Rostowski expects the Polish economy to grow by 1.7% this year, which would give it one of the fastest rates on the continent. "We've got the 1.7% scenario, which, I think, is possible when it comes to budget results, but we cannot exclude even more pessimistic scenarios," Rostowski said. "We're getting ready for them... but I believe that we can express some moderate optimism against a very hostile environment."

When the crisis first hit the region last autumn, one of the Polish government's first responses was to proclaim that it would join the euro by 2012, and the European Exchange Rate Mechanism, a precursor to the euro, by this year. The step was meant to reassure both foreign and domestic audiences that the country was able to meet most of the Maastricht criteria for joining the common currency and was part of that wider push to stress it makes no sense to treat Central Europe as a single unit. "It's an ambitious goal, and it's one we want to achieve, but it's not the end of the world if it slips," said Rostowski.

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Poland finds IMF's new flexible credit line removes stigma of applying for aid

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