Poland must be ready to step into the zloty-bond market should a proposal to cancel government debt held by the nation's pension funds be implemented, money managers at PKO TFI SA and Union Investment TFI SA said.
“In this scenario, we can expect less liquidity and more volatility,” Piotr Nowak, the Warsaw-based deputy head of fixed income at PKO Bank Polski SA's mutual fund, with 12.2 billion zloty ($3.85 billion) of stocks and bonds under management, said by e-mail. The government “may need to be ready to intervene” in big sell-offs, he said.
Prime Minister Donald Tusk's cabinet has outlined three options for overhauling the country's pension system, including the cancellation of $39 billion in government bonds held by the privately run funds. While this solution cuts public debt, it would increase the share of outstanding bonds held by foreign investors to about 44% from 36% as of June 30, Finance Ministry data show. The government will decide on the reform next month.
Polish bonds have gained 1.4% since June 25, the day before the government made its pension proposals, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. This compares with a 1.8% return on the debt of eurozone nations and 2.9% on Hungary's bonds over the period, the data show.
Foreign investors cut their holdings in local-currency bonds by 2.6% from a month earlier to 201.9 billion zloty in June. The sell-off came after the U.S. Federal Reserve said on June 19 that it may reduce monthly bond purchases this year and phase them out by the middle of 2014. Overseas buyers resumed purchases in the last 20 days of July, the Finance Ministry said two weeks ago.
“Foreign investors may rule the market” after the pension system overhaul, according to Dariusz Lasek, head of debt investments at Warsaw-based Union Investment TFI mutual fund, which has 7 billion zloty in assets. Either the central bank or state-owned Bank Gospodarstwa Krajowego, also known as BGK, could “stabilize” bond prices during turbulent periods, Mr. Lasek said by phone on Aug. 5.
The Finance Ministry and the central bank didn't respond to e-mailed questions from Bloomberg. Anna Czyz, a spokeswoman at BGK, said by e-mail Aug. 13 that questions sent to the bank would be answered by the Finance Ministry.
BGK has been active on Poland's bond market in the past. Whether the central bank can intervene on the government bond market has been the subject of debate between the bank and the Finance Ministry.
“There's no ban on the central bank buying government bonds on the secondary market,” Finance Minister Jacek Rostowski said in an interview in early 2012. “If yields increased as a result of panic or contagion from an external virus, and not poor management of public finances, it might be expedient for the central bank to intervene.”
The Narodowy Bank Polski countered that in a statement that its central goal is price stability and it “can't replace the government, particularly on issues connected with public debt management.” Any public speculation on the central bank buying bonds might trigger an “unwanted perception” by financial markets, it said then.
The central bank has avoided unconventional monetary policy measures, such as buying bonds from the Polish government, during the global financial crisis started in 2008.
“We haven't needed to inject liquidity into the Polish banking sector; if there's a problem, it's sterilizing excess liquidity,” central bank Governor Marek Belka said in a July 24 speech to parliament. The central bank sold 127 billion zloty in seven-day bills at an auction on Aug. 9, the most since July 5, according to data compiled by Bloomberg.
As for possible central bank purchases of government bonds on the secondary market, Mr. Belka told lawmakers that they aren't needed and would face the same sort of legal hurdles encountered by the European Central Bank's yet-to-be-deployed unlimited bond-buying program. “It may not be illegal, but it would definitely be difficult,” Mr. Belka said last month.
BGK has “the operational scale and know-how to at least temporarily stabilize the market in case of an intense sell-off,” Pawel Golebiewski, a fund manager at BPH TFI SA mutual fund in Warsaw, which has 2.7 billion zloty in assets, said by phone Aug. 14. It could attempt to reduce yields by buying bonds or by intervening on the derivatives market, he said.
The Finance Ministry could also mitigate the pension overhaul's negative impact by a gradual, drawn-out cancellation of the bonds, Golebiewski said.
“As a rule, you can't buck the market,” Michal Jochymek, senior central and eastern Europe fixed-income trader at BNP Paribas SA in Warsaw, said in an e-mail Aug. 13. “What you can try to do is mitigate short-term volatility.”