Polish central bank governor killed and “unjustified” IMF loan goes ahead

Bloomberg
Polish Central Bank Will Support ‘Unjustified’ Loan Extension
April 30, 2010, 6:37 AM EDT
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By Monika Rozlal
April 30 (Bloomberg) — Poland’s central bank said it will support the government if it asks the International Monetary Fund to extend a $20.5-billion flexible credit line even though it isn’t needed.
“If the finance minister decides access to the flexible credit line is justified by fiscal developments that could affect the country’s balance of payments,” the bank will support it, the Narodowy Bank Polski said today in an e-mailed statement. Even so, “the current level of foreign-exchange reserves provides an ample buffer” for the banking system and “economic conditions in Poland also do not justify seeking access” to the credit line.
The central bank’s management and the government of Prime Minister Donald Tusk have been at odds over what methods to use to trim the budget deficit, which the European Union forecasts will reach 7.5 percent of gross domestic product this year. The rate-setting Monetary Policy Committee, dominated by Tusk nominees, this week lost a battle to hand over a greater share of the bank’s profit to the government.
“There is an enormous risk that the FCL will be used for fuelling the budget gap, which will allow the government to avoid public finance reform and spending cuts,” said Andrzej Kazmierczak, a member of the bank’s Monetary Policy Council.
The credit line, which can be used to augment central bank’s reserves in case the currency comes under pressure, should be extended to act as an “insurance policy” to boost the country’s credibility with investors, Deputy Finance Minister Dominik Radziwill said on March 29.
‘Good Deal’
The MPC on April 28 voted on the credit line, with six members of the 10-seat panel backing the extension, PAP newswire reported, citing an unidentified member of the council.
“The MPC stated explicitly that Poland’s economy needs the flexible credit line,” said policy maker Andrzej Bratkowski. “It’s simply a good deal because the FCL reduces the zloty’s volatility and the risk premium for investing in Poland, which benefits the whole economy. I am astonished at the management board’s statement, because according to the central bank law, the board must carry out resolutions of the Monetary Policy Council.”
Piotr Wiesiolek, acting governor of the Warsaw-based bank, said this week the management board feels rising foreign- exchange reserves are ample to defend the zloty. Official reserve assets totaled $85.2 billion at the end of March, up 39 percent annually.
“The credit line is a certificate of the country’s fiscal credibility,” said Jaroslaw Janecki, chief economist at Societe Generale in Warsaw. “It reduces investment risk and thus lowers the cost of budget deficit financing. Poland needs it to retain credibility and distance itself from the euro-zone countries, which are having problems with their ratings.”
–Editors: Chris Kirkham
To contact the reporters on this story: Monika Rozlal in Warsaw at mrozlal@bloomberg.net
To contact the editor responsible for this story: Chris Kirkham at ckirkham@bloomberg.net

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