beyondbrics

A difference of opinion has emerged between Poland’s central bank and the government about whether to ask the International Monetary Fund to extend its $20.5bn flexible credit line which expires very soon. While, the dispute is not serious – the bank says it will go along with whatever the government decides – it seems that even in the heat of the Greek crisis, officials have their positions to defend.

The central bank worries about the government’s budget hole

The central bank insists the country has no need to ask the Fund for a replacement for the current facility which was put in place on May 6. It says in a statement today that Poland currency reserves are large enough to act as a safety buffer for the banking system, and that Poland’s macroeconomic situation does not call for a facility.

The government takes a different view. Earlier this week Dominik Radziwill, deputy finance minister, said an extension of the FCL was called for because of the turmoil caused by the recent downgrades of Greece, Portugal and Spain.

The country’s currency reserves are estimated at $85.2bn, a 39 per cent increase over last year – but that still puts Poland’s reserves far below those of many other emerging markets. The cost of the FCL is only about $50m a year, which is a fairly cheap way to provide added insurance.

One of the members of the interest-rate setting Monetary Policy Council, Adam Glapinski, tells Reuters today that the bank fears the government would use the money to plug its budget hole – something no government official has yet mooted. “The concern arises that this money (FCL) could be in some way used to support the stability of the budget,” he says.

The issue had been a sore point between the ministry and the bank, but the death of Slawomir Skrzyepk, the former central bank governor, in the April 10 air crash, has taken some heat out of the argument.

In today’s statement, the bank says that if the ministry decidea to reapply for the FCL, then “The National Bank of Poland would be ready to support the government’s efforts.” The IMF supplied FCLs to Poland, as well as Colombia and Mexico, in an attempt to calm market fears about economies that were otherwise well managed.

Poland did not draw on the money, but it did help settle investors, allowing the zloty to break its fall. The back-and-forth between the bank and the ministry has not had much of an impact on currency markets but it might yet, says Piotr Kalisz, senior economist for Poland’s Citi Handlowy bank, a Citigroup unit. “Currency markets are more focussed on what is happening in Greece,” he says, but he warns that could change if the dispute rumbles on.

Although Greece and other peripheral eurozone countries are experiencing problems, Poland is continuing to attract investors. The treasury ministry says today that foreign investors bought 41 per cent of the the 8.1 billion-zloty ($2.7 billion) shares sold in the initial public offering of PZU SA, the government owned insurer. PZU is one of Europe’s largest IPOs this year. So, the central bank may be right on purely economic grounds. But the government is probably right in thinking that it is better to be safe than sorry.