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(Bloomberg) -- Poland’s government faces growing fiscal challenges with Swiss franc mortgage holders reeling and the coal industry in need of a bailout before elections this year. For bond investors, the risks are overshadowed by Mario Draghi.

Amid the prospect of rising Polish defaults on home loans in francs and strikes by miners, buyers of the nation’s debt have focused on the European Central Bank, which analysts say may begin a 550 billion-euro ($635 billion) bond-buying program this week to battle deflation in the euro area. While the zloty is weaker this month, the notes have rallied, sending yields to record lows and shrinking the premium over German bunds.

“Once the ECB’s quantitative easing is out of the way, we could be back in an environment of re-assessment of foreign- exchange risk and the implications on bond positions,” Luis Costa, chief strategist for eastern Europe, the Middle East and Africa at Citigroup Inc. in London, said by e-mail yesterday. “Vulnerabilities of certain central European economies” such as Poland are “an important factor grossly under-appreciated by the markets,” he said.

Although banks stopped offering Swiss-franc mortgages after the zloty’s plunge in 2008, more than half a million families are still paying off $35 billion, according to the financial regulator. The country, which relies on coal for 90 percent of its electricity, is under pressure to pare back the industry as sluggish economic growth cuts demand and drives prices to a seven-year low.

Opposition ‘Feather’

Poland’s presidential vote in May and parliamentary election in the fall may have “implications on the fiscal side,” Costa said.

The zloty tumbled 20 percent against the franc on Jan. 15, when the Swiss National Bank removed a cap on its exchange rate. Poland’s biggest opposition party, Law & Justice, said borrowers should be able fix their mortgages at the exchange rate before the SNB’s decision.

Poland’s Financial Stability Committee, whose members include the finance minister, the central bank governor and the financial market watchdog, is meeting today to discuss the loans. Some commercial lenders will also be present, Jacek Bartkiewicz, a central bank management board member, said in an interview with Radio 1 yesterday.

“Although the franc loan issue should be something that the population and Polish banks can deal with, it is an extra feather in the opposition’s hat,” Simon Quijano-Evans, the London-based head of emerging-market research at Commerzbank AG, said by e-mail yesterday. “For the time being, the spillover should be relatively contained for bonds, especially as so much pre-financing has been done.”

Poland has covered at least 32 percent of this year’s borrowing requirement, based on a Finance Ministry statement on Jan. 8.

Nationwide Strike

The government will need to find additional funds in this year’s budget for the coal industry, Finance Minister Mateusz Szczurek said in the Jan. 19 issue of Bloomberg Businessweek Polska.

After announcing as many as 4,800 job losses in a 2.3 billion-zloty ($618 million) plan for the industry through 2016, the government faced down the prospect of a nationwide strike with a new agreement on Jan. 17 to revamp Kompania Weglowa SA, the European Union’s largest coal miner. The new plan will be 10-20 percent more expensive, Deputy Economy Minister Wojciech Kowalczyk said yesterday.

Polish 10-year yields at 2.28 percent yesterday were four basis points above last week’s record low. The spread over similar-maturity bunds widened two basis points to 184, within 18 basis points of the six-year low in November.

Law & Justice “is now likely to become more vocal” on franc loans in the run-up to elections, Agata Urbanska-Giner, a London-based economist at HSBC Bank Plc, said in a Jan. 15 report. “This could increase investors’ focus on the risks related to power change.”

To contact the reporter on this story: Maciej Onoszko in Warsaw at monoszko@bloomberg.net To contact the editors responsible for this story: Gavin Serkin at gserkin@bloomberg.net; Wojciech Moskwa at wmoskwa@bloomberg.net Zahra Hankir

Bloomberg