Domestic politics dominated the Polish headlines on Thursday as the level of animosity between coalition partners soared to unprecedented highs after Samoobrona’s Andrzej Lepper reiterated that his party would not support the budget in its current form. This would be nothing new, if not for the fact, that the statement came just after party leaders had issued calming signals following a crisis cabinet meeting on the budget late on Wednesday. High ranking PiS politicians reacted immediately – the PiS parliamentary deputy club leader urged Self Defense deputies to join the conservatives or face earlier elections. This in turn triggered a knee-jerk reaction from the zloty - the EUR/PLN pair soared from the 3.94 range back past 3.95. Late in the evening the situation spiraled even further out of control when PM Kaczynski announced his decision to throw Andrzej Lepper out of the government, and hence end the coalition with Samoobrona. The conservatives are now trying to find a majority (possibly including the Polish Peasant Party (PSL), LRP and breakaway deputies from the Samoobrona) in the Sejm to back the 2007 budget, and have given themselves roughly a month to do so. The second option, which looks equally likely at the moment, would be to dissolve the parliament and to stage earlier parliamentary elections in two months time.
Our view: Selling seems inevitable over short term. Nonetheless, one might argue about the potential size of the correction though – we believe that PiS’s tough stance on the budget and against the populist Andrzej Lepper will eventually be appreciated by markets, as it’s clear that the next year’s (hardly revolutionary, but reasonable) budget was not sacrificed for the sake of keeping the coalition alive. On top of this Poland’s strong economic fundamentals and the fact that earlier election would most likely change nothing in terms of the political layout, as well as the fiscal policy, might help offset some of the downside.