Monday, March 29, 2010

NBP-FinMin war: the first casualty is credibility

Poland's Finance Ministry and central bank endeavoured Monday to prove wrong the old adage that the first casualty of war is innocence. In Poland's case, it is clearly credibility.

The backdrop to the rumble is the fact the Finance Ministry is part of a government led by the Civic Platform whereas the National Bank of Poland is run by Slawomir Skrzypek, a man close to the main opposition, Law and Justice. Needless to say, little love is lost beyond the sides.

Enter International Monetary Fund managing director Dominique Strauss-Kahn, the debonair Frenchman who was in Warsaw to lecture Polish economics students on how to do it these days (which is slightly different from the IMF's old view; just ask Finance Minister Jacek Rostowski about that).

The NBP deemed the visit a good time to say Poland doesn't need further access to the IMF's Flexible Credit Line (FCL), a sort of insurance policy allowing Poland to tap over USD 20bn in case of speculative attack and its own foreign-currency reserves are depleted.

Cue the Finance Ministry, which published its own statement saying Poland should extend the FCL, which expires on May 6 and which is credited as having helped save the zloty from further depreciation to the euro and other currencies in an early 2009. The ministry said the FCL provided a prudent "insurance policy" considering still uncertain global economic winds.

Strauss-Kahn ducked the issue, but could not have been too pleased to have been caught up in a very messy domestic dispute. That is not how to impress the big wigs from the West. One would have thought such missteps were a thing of the past, at least until one recalls that Law and Justice, the party that did so much to embarrass Poland in 2005-07, is in a sense involved.

Who's right, you ask? Well, in this particular case, the Finance Ministry is right. Though it pains us to side with a ministry that increasingly looks like a Motivational Poster for "overconfidence," extending the FCL costs basically nothing (a paltry 50 million dollars or so) and does indeed provide insurance for a world in which black swans seem to be breeding at an incredible (dare I say an exponential) rate.

The National Bank of Poland's view is that the bad time are gone, the good times are here and Poland can even afford to give the IMF money, something the NBP proposed but the Finance Ministry later shot down. Yet, the NBP also continually chastises the Finance Ministry for a bloated budget deficit and expresses concern Poland could be Greece if it isn't careful. Which is it Mr. Skrzypek? Is Poland a pacesetting success story not in need of something as seemingly blase as the FCL? Or is it a fiscal dunce requiring continual rapping on its collective knuckles?

While we wait for an answer, we bring up another aspect of this sordid story. The Finance Ministry wants to get the six members it supported on the central bank's Monetary Policy Council (MPC) to vote for as high an NBP profit for 2009 as possible. Since 95% by law must flow to the budget as income and the 2010 budget didn't write in any profit as income, this windfall will directly cut the deficit and borrowing and debt and everything will be fine forever.

Skrzypek, who is quickly looking like the knave in this story, and three MPC members backed by Law and Justice-supported President Lech Kaczynski say the profit should be lower since money is needed for a special reserve that helps offset accounting losses that incur when the zloty appreciates, as all and sundry expect it to this year. This may be so, though the reserve already is said to total 16 billion zloty whereas the last time the zloty strengthened sharply in 2007 total accounting losses due to appreciation were 14 billion.

That makes the NBP look like its merely trying to trip up the government. Why would it do thus?

Should we recall here that presidential elections will be held this October and general elections in 2011. Running against the Civic Platform's candidate will almost surely be President Kaczynski, who we can just note has been responsible for Skrzypek's labour for the past 20 or so years.

The script starts looking like Skrzypek is jerked off that the NBP profit will be set as the government wants, thereby giving a victory of sorts to Civic Platform and a blow to his buddies. Skrzypek, who can stop the FCL from being extended, then spies his one chance of blackmail -- the FCL itself. Now, tricky talks will have to be held, or at least another layer of complication is added.

If you are still here, congratulations. I hope interest was not the first casualty of this blog post.

In light of all the above, one must start asking some basic questions. Why is a political battle being played out over these issues? Or, perhaps, who cares. The fact there is one is the problem. The fact neither side can resolve the situation is a problem, a big one. After all, voters aren't going to understand any of this. This is like fighting over who gets to give the booby prize. No one cares.

But it is still important. Poland's economy performed admirably in 2009 whether this was a bit fortuitous or not. The current ruling coalition is, by comparison with previous ones, solid, predictable and, dare we say, "normal." But whatever the economic crisis that still quakes the globe should have taught anyone is that credibility is key. As the Greeks know well, you lose that and it could be very costly (300 bp above mid-swap costly or even default costly). In the end, the Finance Ministry and the NBP will both be guilty if Poland's fiscal and monetary credibility is destroyed because of petty political squabbles.

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