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The Polish zloty was in an upbeat trend on Friday

27.2.2006 9:40

Despite words of criticism from the European Commission on the fiscal convergence of Poland, the Polish zloty was in an upbeat trend on Friday. The market opened at 3.7940 EUR/PLN and 3.1940 USD/PLN and within the next two hours the currency inched up by almost 0.5%. Later in the day it was unfolded that EU Commission in its report on convergence would warn Poland next week, that political factors might undermine its minority government’s efforts to meet the fiscal euro-zone entry criteria. They noted that presented few weeks ago update of the convergence program didn’t envisage the correction of budget deficit in 2007 to comply with EU standards, as required. In such circumstances the EU’s executive would initiate the block’s excessive deficit procedure, under which deficit-cutting targets could be imposed on Poland. It is worth reminding that meeting the fiscal criteria is crucial for Poland to adopt the euro. Among 10 EU new-members, Poland is the only one that hasn’t declared yet the official euro-zone entry date, as this target is not crucial for the governing conservatives.

Immediately after that the PM Kazimierz Marcinkiewicz replied that Poland only fails to meet the fiscal target due to the treatment of open pension funds, that under Eurostat rules are classified out of the public finance system. Hence it results in an increase of budget deficit by around 1.5% of GDP. He said that the government would like to re-convince the EU regarding classification of the pension funds. We estimate the chances of this success as close to zero, having given the Eurostat decision in this subject that was made exactly one year ago. We expect some nervousness to prevail on the market today as the outcome of the starting MPC meeting is highly uncertain this time. The decision on rates will be made tomorrow and we expect approx 60% chances for a 25 bps rate cut. Zloty up aheed MPC meeting.

(CSOB - Investment research)

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