Polish Prime Minister Donald Tusk may need to overcome the loss of his coalition partner after next month’s election to show investors he can steer the country clear of the euro region’s debt crisis. Tusk is counting on economic growth of more than double the euro region’s pace to help him become the first Polish premier since the collapse of communism 22 years ago to win a second term. With polls showing the premier’s junior coalition partner in danger of losing all their seats after the Oct. 9 election, the risk is that a weaker mandate will hurt Polish bonds that have beaten those of higher rated euro nations in the past year. “If a weak government started to underperform on the deficit plan, things could get bad,” said Kieran Curtis, who helps manage $3.5 billion in emerging-market assets at Aviva Investors in London. Polish bonds have beaten Italian and Belgian debt in the past three months as the threat of contagion from the Greek crisis prompted investors to flee some euro-region assets. Tusk, 54, pledged that Poland, the only European Union member to avoid recession in 2009, would cut the budget deficit below the 27- nation bloc’s fiscal limit of 3 percent of gross domestic product next year. The shortfall was 7.9 percent in 2010. Bond Returns Poland’s benchmark five-year bond, rated A2 by Moody’s Investors Service, returned 3.92 percent in the past three months, compared with 2.03 percent for similar-maturity Belgian debt, rated Aa1, and a 0.14 percent loss for comparable Aa2 Italian bonds, Bloomberg data show. Poland’s EU membership may make it more vulnerable to the effects of the euro region’s crisis as investors assess potential contagion risk. “Poland is certainly not going to be insulated if things go wrong,” said Paul McNamara, who helps manage $8.5 billion of emerging-market debt at GAM Investment Management Ltd. in London. “A German economy that’s barely growing is not helpful for the zloty.” The Polish currency has lost 4.4 percent against the euro in the past three months, the second-worst performance among more than 20 emerging-market currencies tracked by Bloomberg, behind the Turkish lira. Peasants Struggle Tusk, in power since 2007, will likely need a new coalition partner to form a new government, opinion polls suggest. While his Civic Platform enjoys the highest public support with 36 percent of the vote, the Peasants’ Party is below the threshold for parliamentary representation at 4 percent, according to an Aug. 18-24 survey of 1,051 Poles by researcher CBOS. No margin of error was given. Law & Justice, led by former Prime Minister Jaroslaw Kaczynski, had 20 percent backing in the same poll, with the Democratic Left Alliance at 8 percent. Of the opposition parties, Law & Justice opposes state asset sales and urges higher social spending, while the Democratic Left Alliance last month abandoned calls for increased expenditures and is advocating a balanced budget. The Alliance may be a more likely coalition partner after Grzegorz Napieralski, its leader, refrained from spelling out the party’s preferences and said voters must first decide the parliament’s composition. Law & Justice seeks to become the largest group in the legislature and has ruled out co-operation with Civic Platform. Lifetime of Opposition Tusk would nevertheless have to overcome a lifetime of opposition to do business with the Alliance. The party emerged from the Polish United Workers’ Party that ruled Poland for more than four decades after World War II, which Tusk and other Civic Platform leaders fought against as anti-communist dissidents. Relations with Law & Justice, a one-time ally, hit a low after former President Lech Kaczynski was killed in a plane crash last year. Kaczynski’s twin brother, the party leader, has said the government is partly responsible for the accident. “It would be a negative signal to the markets if there were a difficult coalition-building process,” said Ronald Schneider, who helps manage the equivalent of $1.2 billion in emerging-market debt at Vienna-based Raiffeisen Kapitalanlage GmbH. “A government with a strong mandate is definitely needed to push through fiscal consolidation -- that’s what the market is waiting for.” Concern that Poland won’t be able to control its deficit after the election increased the cost of insuring the country’s debt against default. The nation’s credit rating may come under negative pressure as the vote raises the risk of looser budget policy, according to Fitch Ratings. ‘Enforce Its Plans’ “We are awaiting a plan for consistent reduction of deficit and debt, which may be difficult because of this year’s elections,” Piotr Kowalski, head of the ratings company’s local unit, said in a June 14 interview. “There is a risk, given current opinion polls, as it may turn out the current ruling coalition won’t be able to enforce its plans because of purely political reasons.” Five-year credit-default swaps, used to speculate on a borrower’s ability to repay debt or hedge against losses, rose to as much as 236 basis points on Aug. 25 after dropping to as low as 85.3 basis points in March 2010, figures from data provider CMA show. The spread was 216 basis points on Aug. 31. “We’ve been a bit worried that Poland seems to have been ignoring some of its problems,” said Jens Thellesen, who helps manage around $1.2 billion in emerging market debt at Jyske Bank in Silkeborg, Denmark. “In the global environment we have right now, it’s very important to focus on your budget.” Growth Plan The premier needs to meet the government’s forecast of 4 percent economic growth in 2011 and 2012 to meet his budget pledges. Public debt reached 52.8 percent of GDP last year according to Polish accounting standards. At 55 percent, it would trigger mandatory austerity measures. Tax cuts in 2009 helped buoy the internal market in Poland, the EU’s sixth-largest member with a population of 38 million, keeping the country from sinking into recession two years ago as export demand shrank. Economic growth was 4.3 percent in the second quarter from a year earlier, beating the neighboring Czech Republic’s 2.4 percent expansion. The government expects the pace of growth to help it narrow the deficit to less than its 5.6 percent target this year, Deputy Finance Minister Ludwik Kotecki said in an Aug. 31 interview. Tusk has pledged to be vigilant against any overruns. “Nobody in Europe or indeed in the world is in any doubt that one of the main sources of the crisis was irresponsible spending,” he said. “We will, as we have done since 2008 when the first signs of the crisis began to reach Europe and Poland, act in such a way that expenditure doesn’t overstep the boundaries of good sense.” To contact the reporter on this story: Katya Andrusz at kandrusz@bloomberg.net To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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