Jan Cienski in Warsaw -

Just a couple of months ago, Polish politicians and economists generally thought that the global financial crisis would only deal a glancing blow to Poland. Those hopes are now gone.

The theory that emerging economies could decouple from events in Western Europe and the US was shaken in October, when the waves set off by the crisis that started last year with the meltdown of US sub-prime mortgages first hit Hungary and Ukraine and then Latvia. The Polish zloty lurched lower, and the country's banking sector quickly froze up, which sent overvalued real estate prices into a tailspin. Car and steel have also been hit as sales in Western Europe slump.

"I think we've seen some limited effects in the car and car parts industry and really very little else that would indicate that we are seeing any slowdown greater than we were already expecting in August," Jacek Rostowski, Poland's finance minister, tells bne. "Now, I don't deny that given what is happening in Western Europe, we expect the effects to be somewhat greater, but in terms of what we've actually seen, so far it hasn't shown up."

Some business people are hoping that the crisis is essentially over in Poland and the effects will not get much worse. "The crisis we are now seeing is a crisis of confidence, not of the real economy," says Leszek Czarnecki, one of Poland's wealthiest men and the owner of a bank as well as a real estate development company.

However, Czarnecki's own actions belie his words. His bank, Getin, has halted lending in Swiss francs, popular in Poland because of their lower interest rates but now seen as excessively risky. The bank, which has a 111% loan/deposit ratio, has been aggressively trying to lure depositors by offering as much as 9% interest on a four-month deposit. Meanwhile, his real estate company LC Corp has halted construction of what would have been Poland's tallest residential tower in Czarnecki's hometown of Wroclaw, reflecting a sharp downturn in the property market that is dealing a body blow to many developers.

Misplaced optimism

The government's optimism is also fraying. In the early days of the crisis, the finance ministry stuck with a growth projection of 4.8% for next year, down from 5.5% this year. But now that prediction has been cut to 3.7%, and even that is higher than the central bank - which says growth will be 2.8%. Some analysts are predicting the economy may not grow at all in 2009. "Looking at the macroeconomic indicators in Poland, there are obvious signs of a reduction in economic activity," says Slawomir Skrzypek, the governor of Poland's central bank.

For the first few weeks of the crisis, there was a noticeable vacuum of authority in Poland as no one stepped forward to calm people and take the public role of economic commander in chief. That would have been a natural role for Leszek Balcerowicz, the former central bank governor and architect of Poland's post-communist economic reforms, but he didn't have his term renewed by the previous right-wing government. His replacement does not have the same level of authority, and neither Rostowski nor Donald Tusk, the prime minister, took on the function.

That changed as the effects of the slowdown began to be more visible. The government quickly increased bank deposit guarantees to €50,000 and approved a rescue package which is supposed to get credit markets moving again and boost confidence without spending a lot of new money. Now Tusk has made it clear he regards safeguarding the economy as his primary task. "For my government, the most important thing is to retain the foundations of a healthy economy," says Tusk, who adds that he has no plans to follow in the footsteps of Western Europe and the US where government are hoping to revive the economy with the help of enormous infusions of money. "I don't think borrowing money on a huge scale is a good method of resolving the crisis," he explains.

The next months are likely to get worse. Poland's car industry, which makes up about 5% of the economy, is expected to slow further, which will start to affect suppliers. Other exports of products like flat screen televisions are also going to be reduced.

Many corporations, especially those who have short-term loans that fall due in the next 12 months, are going to find it very difficult to get those loans refinanced by skittish banks. That could mean a wave of corporate bankruptcies will sweep through the economy next year, driving up unemployment and denting consumer confidence, which has been one of the mainstays of the Polish economy.

However, most analysts still feel that the crisis will be milder in Poland than further west. "Once things settle down in the first half of next year, although I can't be sure, then there is no reason... that the long-established relationship between the Polish and European rate of growth, which is about 4%, will not be re-established," says Rostowski.

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