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OO RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHWR #1217/01 2911507
ZNR UUUUU ZZH
O 171507Z OCT 08
FM AMEMBASSY WARSAW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7176
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
UNCLAS SECTION 01 OF 02 WARSAW 001217
SENSITIVE
SIPDIS
TREASURY FOR STEPHEN WINN; COMMERCE FOR MIKE ROGERS
E.O. 12958: N/A
TAGS: ECON EFIN PL
SUBJECT: POLISH FINANCIAL SECTOR OK; THE REAL WORRY IS THE
REAL ECONOMY
REF: ROME 1247
1. (SBU) Summary: After months of denial that worsening
global economic conditions would have a significant impact
here, Poland,s economic elite is wakening to increased risk.
Poland does not appear to share the immediate risk to its
bank balance sheets that is crippling global finance, though
parent banks - like Unicredito and Commerzbank - are
transmitting weakness and uncertainty into the Polish
financial system via their local subsidiaries. Despite
markets' inclination to treat Central Europe's emerging
economies alike, Poland shares neither Hungary's
macroeconomic imbalances nor its risk of insolvency. Concern
here is for the real economy, as weakness in Poland's trade
and investment partners take their toll in the form of
reduced production, restricted credit, and lost investment
opportunity. End Summary.
The Financial System
--------------------
2. (SBU) Over 70 percent of Poland's banking system (by
assets) is managed by subsidiaries of parent banks based in
the EU-15 and the United States. The subsidiaries remain
focused on profitable credit intermediation in the Polish
market. Our contacts universally agree that local banks'
balance sheets are strong, with few illiquid assets of the
kind weighing down global financial markets. However, we
have heard concern about some banks' need for continuing
access to short-term foreign currency loans from their
parents, used to finance longer-term mortgage lending
(duration risk). Non-performing loans make up only 3.1
percent of existing credit and 90 percent of bank credit is
covered by domestic deposits. Moreover, the domestic market
for assets like consumer credit and mortgages is sufficiently
immature - mortgages came on offer only four years ago - that
derivative instruments based on them have not emerged.
3. (SBU) Though Polish banks are healthy, their parent
companies are under tremendous pressure at home, pressure all
our contacts agree the parents are transmitting to their
subsidiaries. Polish bankers regard orders from the home
office to restrict commercial and real estate lending, for
example, as a reaction to weakness in home markets rather
than in Poland. Orders to restrict lending in the domestic
interbank market - rather than mistrust among local
affiliates - have led to higher interbank rates and a
liquidity imbalance in the generally liquid zloty market.
One bank's chief economist told us that, though the parents
cannot directly and openly siphon capital from their
subsidiaries, "they can find ways". Market-leader Pekao
denied widespread rumors that its parent bank - Unicredito -
had extracted over $350 million in capital from Pekao, but
suspicion of just that kind of capital siphoning remains
widespread.
4. (SBU) The National Bank of Poland (NBP) introduced a
"Confidence Package" October 14, both to restore smooth
functioning of the interbank market and to facilitate banks'
foreign currency borrowing needs through foreign currency
swaps. Though the Package is welcome and did lower interbank
rates, our contacts agree trust and calm will not return to
local financial markets until calm has returned to
international markets. They also agree that, while financial
turmoil is a problem to manage, the real threat to Poland is
weakness in its trade and investment partners.
The Real Economy
----------------
5. (U) That weakness is already sapping growth here. Local
economists are quickly revising downward their GDP growth
estimates for 2009, to 3-4%, down from 4.5-5.0%. Industrial
production and construction are already contracting, though
overall domestic consumption - the driver of growth in recent
years - remains stable.
6. (SBU) On the ground level, the story is darker. GM's
plant in Gliwice (protect) has already reduced production by
15-20%. GM Manufacturing's Managing Director fears he will
soon have to begin layoffs, though some of his pain may be
absorbed by higher-cost GM plants elsewhere in Europe.
Aspect Energy of Denver had begun laying the groundwork for a
natural gas exploration and production investment here,
following a similar successful project in Hungary. Aspect's
CEO canceled his trip to finalize the project at the last
minute, having been notified by his lenders and partners to
WARSAW 00001217 002 OF 002
halt all investment projects. Cargill's local alcohol
production business relies on local short-term credit to buy
input, which it repays out of cash flow. However, Cargill
now reports recent difficulty obtaining what, until recently,
was a routine loan.
7. (SBU) Slower growth in Poland is not by itself a bad
thing. Into September, local economists welcomed lower GDP
growth as relief for wage-driven inflation pressures - until
recently seen as the principle threat to Polish economic
stability. However, the scale of weakness in Poland's
partners and the uncertainty surrounding the financial crisis
have Polish economists wondering if they are about to
experience once again the pain of Russia's collapse in 1998.
As the situation develops, we are particularly watching three
vulnerabilities.
Vulnerabilities
---------------
8. (SBU) Currency Risk: Between 50 and 60 percent of the
Polish mortgage market is denominated in Swiss francs (CHF).
While lower foreign interest rates and the rising zloty made
this a good, affordable bet for many borrowers in recent
years, those borrowers are now paying much more for their
loans than in August. A homeowner who borrowed in CHF is now
paying 17 percent more every month. Banks too have assumed
risk in this process since they finance their long-term
foreign currency lending with short-term borrowing. That
borrowing must be rolled-over, but short-term foreign
currency loans are increasingly expensive and hard to come by
in the midst of crisis.
9. (U) The Diaspora: Though good estimates are lacking, well
over a million Poles have taken advantage of their ability to
work in higher-wage, lower-unemployment Europe. Should
increasing unemployment in Britain and Ireland send Poles
there back home, Poland would see a spike in the number of
job seekers just as the job market here begins to soften.
10. (SBU) Confidence in Markets and Potential GoP Response:
Polling data suggests most Poles fear the crisis could come
to Poland -- and they also doubt their government's ability
to respond. Politically, as the Deputy Mayor of Gliwice told
CG Krakow, Polish leaders know that Poland will suffer some
degree of pain in the crisis, but they do not want to sow
panic among workers by announcing that. However, some
bankers have complained to us privately that by keeping quiet
to avoid panic, the government is actually increasing
uncertainty and losing credibility.
Comment
-------
11. (SBU) Poland is no Iceland, nor is it Hungary. With its
conservative banking subsidiaries, small mortgage market, and
strong macroeconomic fundamentals, Poland is not likely to
suffer severe direct effects of the global financial crisis.
Growth will slow exports, investment, and domestic demand
decline, though those effects could be moderated by zloty
depreciation and production shifting from higher-cost Europe.
We will keep a close eye on three X-factors - Poland's
European Diaspora, Swiss franc-denominated mortgages, and
government management of uncertainty - but for now, we expect
to see ahead old-fashioned, unpleasant economic weakness.
QUANRUD