World Crisis Online

With reduced borrowing needs and one of Europe’s best-performing economies, Poland expects to have little trouble selling its sovereign debt this year.

But it will come at a cost. “The era of cheap debt is ending,” says Dominik Radziwill, deputy finance minister. Borrowing costs are expected to rise this year, due to a rise in inflation, which surprised on the upside in January by coming in at an annual rate of 3.8 per cent. The central bank has already increased its benchmark rate by a quarter point from its previous record low of 3.5 per cent, and further hikes are expected later this year.

So far, Polish debt is selling for slightly less than that of troubled eurozone countries – a January sale of 10-year euro-denominated bonds was priced at 10 basis points less than Spanish bonds sold at a similar time.

But if Poland is to maintain the good faith of investors it will need to bring in a credible fiscal tightening plan after this autumn’s parliamentary elections – where the ruling Civic Platform party is widely expected to win a second term. The Czech Republic, which has done a more ambitious job of fiscal tightening than Poland, is trading at 2 basis points less than Polish debt.

“Poland is no longer the single shining star of emerging Europe,” says Lars Christensen, an analyst with Danske Bank. “The message is that the government cannot sit around being complacent and expect the money to keep flowing in.”

Poland’s gross borrowing needs are set at 167.5bn zlotys ($57.4bn), down by 7.1 per cent compared with 2010, and could come down by a further 11bn zlotys if the government manages to push through its plan to reduce payments flowing into privately managed pension funds.

Mr Radziwill predicts that Poland’s public debt will stabilise this year before beginning to fall as a percentage of gross domestic product in 2012. According to the Polish methodology, narrower than that used by the European Commission, public debt in 2010 came to 53.5 per cent of GDP.

He also says that the deficit, which came to at least 7.9 per cent of GDP last year, will fall to 5.5 per cent of GDP in 2011.

In spite of the slightly better picture, Poland is moving quickly to secure the money it will need to finance its debt. By the end of January the country had met 18 per cent of its borrowing needs, issuing bonds in zlotys, euros and Swiss francs. Next month Mr Radziwill will travel to China, which has shown increasing interest in buying European debt.

Some analysts concur with Mr Radziwill’s optimistic assessment. “There is strong appetite for anything Polish related because people see it as a country that did well during the downturn,” says Nigel Rendell, emerging market analyst with RBC Capital Markets.