Poland’s Nuclear Standoff Sting

Polish shares sank 3 percent on the MSCI Index through May, as the European Commission brandished the “nuclear option” of cutting off structural aid after criticism of the ruling Law and Justice Party’s “anti-democratic” moves at court and media control. Warsaw has countered by accusing Brussels of interference and threatening to boycott votes before that power is revoked under possible sanctions. The communications crackdown is part of a deliberate strategy to slash foreign ownership two-thirds to a 25 percent ceiling, as hundreds of journalists were sacked or resigned from public channels. Former presidents and prime ministers have weighed in on the controversy with a clear call to curb intrusions, which was echoed by departing central bank head Belka in relation to the mandatory Swiss franc mortgage conversion proposal he described as an “evil crisis recipe.” The formula follows Hungary’s model at an estimated industry cost of $10 billion, which would fall mostly on the 60 percent internationally-owned share in the wake of a separate new asset tax. State bank executives have been replaced across-the-board by the populist administration, and they have increased government debt positions after foreign holders trimmed theirs with the early year sovereign downgrade on institutional and fiscal weakening. The 10-year yield is at 3 percent as deflation persists and the budget deficit is likely to come in above the 3 percent EU warning threshold. Ratings agencies added a negative outlook on the expectation of a prolonged constitutional crisis, and voiced doubt about the reported 50 percent of GDP public debt level to stay within statutory limits.

 Solid 3 percent consumption-led growth is projected this year, but in external accounts halting FDI and large error and omission numbers are concerns. Unemployment remains in double-digits and the immigration route to the UK could close altogether with a Brexit nod in the late June referendum. Warsaw Stock Exchange officials scoff at neighbors’ attempts to vie for regional influence as privatization plans are indefinitely shelved. Meanwhile Romania has large divestitures scheduled, Hungary will push for small business listings, and the Czech Republic after a long drought launched two IPOs. Budapest also laid global financial center claims after a Chinese currency “dim sum” bond was launched there in April, following establishment of a Bank of China clearing unit. It has also signed on to Beijing’s $40 billion One Belt One Road outward investment scheme, and plans to seek AIIB infrastructure funding, and Poland too may be tempted by this path should European relations further sour.

Poland-Ukraine stock market links are on hold despite ambitious cross-listing and harmonization designs dating back a decade. Ukraine’s MSCI component was up 7 percent through May after a new prime minister was named and energy reform legislation was tabled that may unlock the IMF’s withheld $1.7 billion payment. The central bank cut the benchmark interest rate below 20 percent as inflation steadies in the 15 percent range and the currency at 25 to the dollar. Banking sector cleanup has progressed amid the headline recriminations between oligarchs and policymakers, with 70 institutions closed and new insider lending rules in effect. Capital controls imposed since the Maidan events could soon be relaxed in light of the overhaul, but the consumer and corporate confidence standoff lingers.

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