Analysis: Polish PM's return a relief for markets but no panacea

WARSAW Sun Oct 9, 2011 7:39pm EDT

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WARSAW (Reuters) - Victory for Polish Prime Minister Donald Tusk's ruling center-right Civic Platform (PO) in Sunday's election brings relief to jittery financial markets but they will soon demand action on cutting the budget deficit and debt.

Tusk's PO won nearly 40 percent of the vote, exit polls showed, many more than its nearest rival, Jaroslaw Kaczynski's nationalist-conservative Law and Justice party, and is expected to renew its coalition with the small Peasants' Party.

Tusk swiftly claimed victory and Kaczynski conceded defeat, though final results are not expected until Tuesday evening.

"The markets will treat this result as another feather in Poland's cap," said Nicholas Spiro, head of the London-based consultancy Spiro Sovereign Strategy.

"This is a vote for stability more than anything else. It is a vote for gradual and uninspiring reforms. From a market standpoint, one of the key anchors of Poland's creditworthiness has remained in place."

"Whether this results in the kind of fiscal and structural reforms Poland needs is debatable given PO's preference for caution," he added.

Tusk's government steered Poland smoothly through the 2008-09 global financial crisis without dipping into recession, though his failure to press more radical market reforms disappointed more liberal supporters.

Judging by the initial comments of the Tusk camp Sunday evening, caution is likely to remain the hallmark of the new government.

"At a time of global crisis, such turmoil on the global markets, even gradual reforms will require brave decisions and our coalition will continue to do them effectively," Michal Boni, an aide to the prime minister, told Reuters.

DEFICIT CHALLENGE

Rating agencies have warned of possible downgrades for Poland if the new government fails swiftly to rein in public debt and the budget deficit, though Finance Minister Jacek Rostowski has ruled out any radical economic changes in the event of a PO election victory.

Sunday evening Rostowski -- who is expected to keep his job in the new government -- reiterated to Reuters his plan to bring the deficit to below the EU's 3 percent of gross domestic product next year from an expected 5.6 percent in 2011.

Many economist are sceptical that this can be done, especially in view of slowing economic growth. Poland's economy is expected to expand by 4 percent this year but the IMF and many banks have now trimmed back their forecasts for 2012.

But for now, markets are likely to applaud the election result, especially at a time of crisis in other European member states as they tackle the euro zone debt crisis.

Investors had feared a messier outcome that could have led to prolonged political horse-trading and a weak three- or even four-party coalition.

They had also fretted over a possible win for Kaczynski, who favours more state involvement in the economy, higher taxes on the rich and an end to large-scale privatisations.

"From the point of view of the markets, this is very good news. Investors (were) worried that we could see a coalition made up of three parties... I expect a positive opening, stronger zloty and a rise in bond prices," Ernest Pytlarczyk, chief economist at BRE Bank said Sunday.

The zloty has lost more than 10 percent against the euro in the past three months as investors flee riskier emerging markets amid fears over the global economy and the euro zone crisis.

"Now everybody will keep a close eye on the new government and its main target is fiscal consolidation and defending the debt-to-GDP ratio below 55 percent," said Pytlarczyk.

The new government will want to prevent debt from exceeding the 55 percent level because under Polish law this would automatically trigger deep spending cuts that could further hinder economic growth.

(Additional reporting by Gabriela Baczynska, writing by Gareth Jones, editing by Timothy Heritage)

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