Poland Goes South?

According to an analysis by PolandSecurities,com, the Polish nation is in for a financial shock that may put Greece in the little league by comparison.  For the last six years the people of Poland has increased their mortgage debt by nearly 800%, fueled by overoptimistic forecasts provided by the local government, foreign banks and the EU. The transfers from the EU made it possible for the Polish government to minimize effects of the 2008-2010 crisis, but also caused a complete lack of any financial reforms. Over the last 3 years, Polish public debt has risen from 529 billion zloty to 778 billion zloty (195 billion euro). This looks like another catastrophe just waiting to happen.

“We were dealing with either lack of common sense or with corruption of the employees of financial supervisory sector.”

Jaroslaw Suplacz

This piece of insight provided by Polish analyst Jaroslaw Suplacz is right out scary. For some reason, the economic developments in Poland have been flying under the radar. Perhaps not surprising when you learn that 90% of the population see tax fraud as a completely normal thing, and corruption as a natural part of business.

If there’s such a thing as an overstimulated economy, Poland definitively falls into that category.

The Polish GDP is strongly influenced by a stream of financial transfers from the European Union. In 2010 the net income from the EU budget was about 8 billion euro.

If not for the transfers from the European Union, the change of the Polish GDP (in relation to 2009) would have been lower by at least 6 percentage points, and would be dropping sharply.

Moreover, the Polish annual GDP is about 350 billion euro, the amount of net income of 8 billion euro from the EU’s budget is equivalent to 2.3 % of the GDP.

However, PolandSecurities.com point to the following facts:

“In a short-term life cycle assessment, it can be estimated that expenses resulting from a subsidy that Poland receives have a multiplier effect of 3-4 times. Companies and employees completing projects financed by the Union spend monies earned on other goods and services so that other producers also purchase others goods etc. Already in a short period concerns the projects implementation it is possible to consider that the amount of 8 billion euro of annual income from the Union increases the Polish GDP by at least 20 billion euro or by about 6 percentage points.”

The Polish government explains that the high deficit of public finances stems from financial transfers from the Union, and is a result of a need to provide own contribution when implementing projects co-financed with assistance programs.

But Jaroslaw Suplacz  writes:

“This justification is good for the public and within the framework of a political campaign, however is it not well grounded in facts.”

And now it starts getting really interesting…

The transfers from the Union made it possible for the Polish government to minimize effects of the of the 2008-2010 crisis. But they’ve also caused a complete lack of any public finance reforms in Poland, according to the analyst.

Poland had one of the highest budget deficits in Europe in 2010, higher than in Iceland and just a bit lower than Greece, and is one of the EU member states with the highest budget deficits (higher than 6 percent in 2010).

But while Greece in 2010 decreased its deficit from more than 15 percent of GDP in 2009 to about 8 percent, Poland increased its deficit from 7,1 percent to almost 8 percent of GDP.

The forecasts by the governments Ministry of Finance predicted a drop of deficit to 6,9 percent of GDP.

“The obligations of the Polish budget practically do not capture the reserve pertaining to demographic changes for earned benefits for future retirees. The reserve created for this purpose is a fraction of the state’s obligations of the benefits owed to the future retirees. If a reserve resulting from demographic changes were considered in its real amount, it would transcend the relation of 60 percent of public debt to GDP by tens of percentage points.” Mr. Suplacz writes.

And it just keeps getting worse:

“Much of the resources transferred within the framework of assistance programs are wasted in Poland. A country of a high level of corruption is unfortunately quite different from France, Germany or Denmark. As an example, money for the training of the unemployed directed to employment offices seem like a very sensible idea. However, how is this program executed in Poland? More than one local official, upon seeing the pools of money that will pass through his/her office is motivated to contact an owner of a training company or call on a company of a friend which will be training the unemployed from the Union means. The tender for the service for the office has high chances of being fixed by the arbitrators who evaluate it. The higher the level and with larger projects, one can expect corruption.”

“Another example of the waste of Union money in Poland is the financing of controversial projects. For example, in Plock city, of which I am a resident, the construction of a pier with a restaurant – pictures link – was funded from Union monies. The media make fun of this investment that it is probably the only pier in Europe built along a river with the
restaurant from public monies. The Poles know very well that the Union is not too stupid and before it opens its eyes, one should take as much of what is given… This manna from heaven caused a situation in which officials at all levels are busy going through as much of the Union funding as possible, nevertheless the real problems remain unsolved.”

And here’s a real kicker:

“When it is all accounted for it may turn out that it was not only the Union who lost money on the assistance programs but also Poland may turn out to be a losing party, where the distribution of Union funding only increased the scale of corruption and first of all the reform of public finance has been neglected.”

This one is for Mrs. Angela Merkel:

“The Germans are probably starting to understand that they have been set up and that they should watch the value of their currency and besides the reality of a world economic crisis which includes their country just the same as any other, they have to struggle with problems which are not theirs. The wealth of Germany may evaporate very quickly in this way because they are in a very different situation than the United States. From a point of view that emphasizes the well-being of Germany, their anti-crisis policy should be opposite to the one conducted by Ben Bernanke – more on this subject under “Between Monetary Policies. Where are markets heading to?”” (Copy here).

For the rest of the EU leaders – here’s to you:

“The attempt to fight the deficit showed that the blanket is getting shorter and shorter, the rate of shortening of the blanket must be troubling to the government, it is clear that the Polish economy is not able to meet the markets’ demands on one hand, and the roused hopes of the Poles which the government constantly increased in the name of a permanent election campaign, on the other. Both realities have to collide with each other. All of the energy of the government is directed towards survival until the elections. In Poland the parliament, but even self-governing entities are a partisan booty and the time horizon reaches the elections period.”

“Unfortunately, the western, more developed democracies did not foresee some things, their assistance programs very often serve to support social pathologies, ineffective budgets and they lead to the bankruptcy of economies that they assist.”

Well, I guess that’s what “animal spirits” are all about….

As a preliminary conclusion, Mr. Suplacz writes:

“The most fundamental form of the revaluation of the Polish debt will be the drop in the value of Polish zloty, which will be forced by the market. At the same time, the government, to decrease the burden of domestic debt denominated in zloty will be forced to lower the real interest rates, which is most often achieved indirectly through the increase in inflation. Inflation will at the same answer to the devaluation of zloty. A shock awaits Poland with the adjustment of expense possibilities, both public and private, with economic possibilities. Labor efficiency, structure of employment, number of people using retirement and pension benefits, holes in the retirement system, financing of health care, countering pathologies such as corruption which unfortunately place Poland closer to Russia than to Europe, all of it is awaiting changes.”

Please take the time to study the full analysis, embedded below:

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7 responses to “Poland Goes South?

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  6. In Poland, with a budget just like in Greece, is distorted because they do not reflect reserves for retirement benefits already earned, according to economists estimate it could be a value between 1-2 trillion zloty. Currently, the public debt is around 800 billion and it is 55% of GDP. As we can see the addition reserves makes Greek situation

    The Polish government knows this, but called the missing reserves as off-balance sheet liabilities, it is not fair, because the reserve due to expected demographic changes and the obligations of the state.

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