Foreign investors concerned about the effect on bond prices.
Poland's new political elite: President Lech (l) and his brother Jaroslaw Kaczynski
The policies of Polands new government could have a detrimental impact on the countrys goal of joining the euro by 2010, analysts say.
This, in turn, is expected to have a negative effect on the countrys domestic debt, which had been taken up by an influx of non-resident buyers in the past 12 months on the expectation of a post-election outlook favourable for EMU convergence.
Although the countrys new prime minister, Kazimierz Marcinkiewicz, won a confidence vote in his minority government on November 10, his coalition looks fragmented.
Marcinkiewicz formed a government after his conservative Law and Justice Party (PiS) won 155 of 460 parliamentary seats in September. It was expected to rule in coalition with liberal party Civic Platform, which took 133 seats, but talks broke down, leading PiS to seek support from minority parties.
PiS is chaired by Jaroslaw Kaczysnki, whose twin brother, Lech, is Polands new president.
Minority blocs Self Defence, LPR and PSL have made their support for PiS conditional on its shifting its policy stance to the left. Some of the minority parties, for example, advocate a halt to all privatization. Much of PiSs programme appears to be focused on boosting economic growth, rather than structural and fiscal reform.
Zloty pressureWe see the current political set-up in Poland as zloty-negative, says Olivier Desbarres, a fixed income research analyst at CSFB in London. Populist parties are informally supporting the minority PiS government. This is not conducive to fiscal consolidation and the PiS government seems to ascribe a low priority to entering EMU. We think that foreign investors who are already long Polish bonds could exit from their positions to the detriment of the zloty.
Forward starting Polish yields over the euro have recently sharply widened, suggesting that the market has already started to price a lower probability of EMU membership. The zloty had already risen from 3.86 to the euro in early October to 4 to the euro by mid-November, with further widening expected.
The outgoing government bought about $500 million of zloty on the open forex market in late October, but analysts fear that the new government could turn this mechanism around, converting zloty required to finance its external debt.
Marcinkiewicz has already ruled out adopting the euro before 2010, although the outgoing government had targeted 2009.
Dresdner Kleinwort Wasserstein analyst Ivailo Vesselinov predicts that a weak coalition is likely to lead to early elections, and the associated uncertainty would weigh on investor sentiment towards Polish assets in the interim, with further weakening possible.