The Outlook for Poland for the Next Two Years

2010 has been a wild year, especially in the financial and business world.  In the beginning, the markets didn't know what to do with Greece and their pesky financial problems.  The PIIGS shook the world's faith in the EU and the euro; China surpassed Japan in terms of GDP; the US fears of a double-dip recession are ongoing; and the stock market doesn't know what the hell to do.  Most EU states have implement almost-draconian austerity measures to curb debt.  Meanwhile, Sarkozy tries to tweak France's retirement age a little (upping it from sixty to sixty-two) and that causes them to go on strike yet again.  Poland, all the while, has been growing and growing.  Its infrastructure projects and renovations have exploded into a rush to complete everything before 2012.

2012 seems to be a magic year.  Besides the "Mayan prediction" and superstitions, there's a super sun storm that might disrupt electronics on earth; there's the EuroCup 2012; the 2012 Olympics in London; and 2012 may be the year that when investors get cold feet over Poland's debt and stop buying its bonds, forcing major austerity measures.

How it works:

Right now, Poland's economy is growing (let's say, 4%.)  With a rise in its GDP, there is also a rise in its debt, this is natural.  EU money (as well as Norwegian money) is pouring into Poland in enormous amounts.  The rub is when the debt grows faster than economy does (let's say, 5%.)  With Poland's economy growing, Poland looks to be a good place to invest money (buying bonds.  In a month or two, Poland will hike rates, which will make it more attractive to buy Polish bonds.)  When more money is invested, the economy grows, which leads to more investment, which leads to further growth and so on.  This can all come to a head when investors start to doubt Poland's ability to pay back its debt (bonds).  They will pull their money out of Poland, which will cause the economy to shrink, which will cause further doubt about the Polish bonds, which will cause more investment to be pulled out, etc.  Pretty much what happened with Greece.

Now, a little birdy told me (someone who is intimate with the situation) warned that Poland has about two more years until the party is over and the government has to enact difficult-to-swallow reforms.  I should warn that the amount of time is purely circumspect and no one really knows; it could be two years, eighteen months, three years, or any amount of time in the near future.  It's like waiting for a small bomb to go off, not knowing how long the timer is.

Right now, Poland is standing in the middle of the tracks, watching the train rush towards it.  Solving the problem is not so much about knowing what to do—most people know what must be done—but about having the political will to actually do it.  Poland needs reforms in government spending, and it needs it soon.  The recent election might have given PO a stronger grip on power, but the surprisingly strong show for Kaczynski sent a message.  The cutbacks in spending that are needed will not be coming any time soon: PO can't risk it politically to make such unpopular decisions.

Members in the financial community have consulted with ministers of Poland, sharing their pessimistic outlook.  The ministers (Boni in particular.  Boni is the fourth-most powerful minister in Poland) agreed; however, told them point blank that the government cannot risk such a politically dangerous program.  Instead, Poland has resorted to accounting tricks to hide and cover its debt (not unlike Greece.)  These tricks serve as a temporary solution and will make the blowup all the more painful.  The tricks do, however, allow the politicians to make claims and be bullish about the economy and government spending.  So, Poland will stand in front on the train until either the last minute, or until the train runs them over.

When austerity measures come (and they will come), it probably won't be as bad as in Greece.  A few things to look for:

1)  The VAT will rise, but gradually.  It'll be 1% at a time in increments.

2)  The retirement age will rise.  Right now, it stands at sixty years for women and sixty-five years for men.  Expect at least two-year rises in each.  Poland's aging (and shrinking) population will have to work longer and expect less benefits when they retire.

3)  Public salaries will be frozen at the least, cut at the most.  Public-sector jobs will have their raises and benefits trimmed.  Also, layoffs probably will happen.

4)  The construction boom will wind down.  Poland's construction boom, financed with a lot of EU money, might wind down.  That's not to say that it won't go on, just at a slower pace.

5)  An increase in fees.  Fees, fees, fees.  They raise money.  Expect them all over the place, and increases in the current ones.

6)  If Poland hasn't joined the euro area by then, the zloty will be printed en masse and a de-valuation will happen.  When you need to pay debt and you exert control over your own currency: print money.

Sound bleak and depressing?  Kind of is, but it might be necessary.  The thing is, the Polish government has mastered the art of public relations.  Everything is often overstated and in an optimistic light.  Everything from the economic outlook, to foreign relations, to the shale gas that I often yap about.  The government isn't about to admit this coming problem just yet, and will probably deny it until the problem has already broken.  Call it a black swan in the coming.
The crisis probably won't be as bad as Greece's, and these reforms will be able to handle it, but it pays to be prepared.  Poland does have a few weapons to combat it and can also lean on fellow EU members for support.

I'll end this with a big  WHO KNOWS?  Why?  Because a lot can happen in this amount of time.  Poland's shale gas might be just as big as they say it (but probably won't be producing for quite a while.) Poland's economy might outpace its debt; Polish politicians might force the bitter medicine and take reforms; there might be some big global or regional event that will help Poland avoid all these problems. But, all the same, I'll remain bearish in the long-term, but bullish in the near-term.