Poland faces a change in the debt limit. What does that mean for the złoty?

Debt limits are getting closer. Economists warn about the cost of putting off a decision

Under the current fiscal trajectory, without clear consolidation, Poland may need changes to its constitutional debt limits, chief economists from Polish banks said during a debate at the European Economic Congress in Sopot. In their view, the issue may stay in the background for a long time, but if a shock hits, it could surface abruptly.

Velo Bank chief economist Piotr Arak spoke of a creeping constitutional crisis as the public debt limit set out in the Public Finance Act and the constitution draws near in 2028-29. In his view, the dispute may concern not so much taxes or spending cuts as the very definition of debt.

Arak pointed out that some of today’s spending could be moved outside the current budgetary framework, and in practice that could serve to bypass the constitutional 60 proc. of GDP threshold. He also noted that such a move would trigger a major debate about legality and compliance with the constitution.

The economist said there is no simple fix other than changing the constitution or redesigning fiscal rules. He added that the state may face structurally higher public debt in the coming years.

The risk of pushing the problem into the future

Erste chief economist Piotr Bielski sees the issue in a similar way. He noted that with the public finance sector deficit close to 7 proc. of GDP, it is hard to count on rapid fiscal consolidation, especially before elections.

In his view, a natural temptation may be to change the rules and the definition of debt if the current framework starts weighing more heavily on budget policy. As he stressed, such a scenario does not solve the problem, only postpones it.

Bielski also said that if the political balance shifts, it may be easy to seize the moment when the state runs up against legal or constitutional barriers. That is exactly when, in his view, pressure to change the rules may emerge.

Monika Kurtek, chief economist at Bank Pocztowy, struck a similar note. In her view, Poland is not growing out of debt if debt is rising faster than GDP.

Banks, ratings and state financing

Kurtek pointed out that spending on defense is already increasing debt, but it will show up in the public finance deficit only when the equipment actually enters the Polish customs territory. That means pressure on the deficit may continue in the years ahead as well.

In her view, Poland does not face a very bad fiscal situation over the next 3-5 years, but the problems are clearly deepening. She also said rating agencies’ behavior will be important, especially if negative outlooks were to translate into a lower credit rating.

ING Bank Śląski chief economist Rafał Benecki takes a different view. He said Polish debt is already pricing in a two-notch rating downgrade, and agencies’ ratings alone do not have to force fiscal tightening.

Benecki said that if foreign debt and foreign exchange reserves are taken into account, the picture is not as worrying as some forecasts suggest. He added that a political deal easing the rules is possible, including thresholds at 55 proc. of GDP, and perhaps even 60 proc.

PKO BP chief economist Piotr Bujak stressed, meanwhile, that some large European economies have higher debt than Poland and still manage to finance the state’s needs. In his view, domestic savings, concentrated mainly in the banking sector, can still support demand for government bonds.

Bujak noted that even if the rating were cut by 1-2 notches, he does not expect large domestic banks to stop buying Polish government securities. He warned, however, that in the event of a bigger external shock, higher bond yields could weaken lending and trigger a negative feedback loop in the economy.

mBank chief economist Marcin Mazurek pointed out that fiscal adjustments may come suddenly rather than gradually. He said the share of foreign investors in Polish debt means a small group of market participants can at some point have a strong impact on the situation.

The economists agreed on one thing: delaying decisions does not remove the problem, it only raises the risk that the eventual adjustment will be more abrupt. At the heart of the debate is the question of whether the state will change the rules in advance, or only under pressure from the market and the law.

Sources

1. Statistics Poland