Polish pension reform to trigger cut in constitutional debt limits

By bne IntelliNews September 30, 2013

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Poland will lower its constitutional debt limits to match the effect of the pending overhaul of its pensions system on state debt levels, an official said on September 27.

The move of pension assets from private pension funds to the state system is forecast to shave 8 percentage points off Polish state debt, which has already crossed the lower 50% of GDP threshold. Poland said when introducing the reform that it would reduce the thresholds to match the effect.

During a conversation on Twitter, Deputy Finance Minister Janusz Cichon wrote that the constitutional limits will be dropped by 7 pp each - to leave them at 43% and 48% of GDP respectively - according to cbonds. The limits are intended to work as automatic stabilizers, and commit the government to apply austerity measures if crossed.

However, earlier this year, Warsaw simply scrapped the lower limit, after attempts to rejig accounting methods failed to pull the level of state debt away from encroaching upon it. Officials have complained that the lower threshold was preventing Warsaw from taking full advantage of the rally in emerging market debt.

The pension reform will include a shift of all treasury bonds from private pension funds to individual accounts within the social security system, thus removing it from calculations of state debt. The pension reform is a populist step for a government facing dropping support, and will help it shore up the budget by diverting flows that currently go to private funds. However, it is likely to hit Polish bonds and equities, and increases the likelihood of a pensions crunch in the long term.

Finance Minister Jacek Rostowski said as the reform was unveiled on September 4 that he forecasts the changes will reduce public debt by about 8% of GDP. Public debt in 2012 stood at 52.7% according to government calculations.

Poland's draft budget for 2014 - approved by the government on September 27 - raised target borrowing by PLN800m to PLN132.6bn (€31bn), despite dropping the deficit forecast on the back of the pension reform. Warsaw said it expects its debt-to-GDP ratio to hit 54.8% this year, before falling to 47.1% in 2014.

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