Poland's markets tumble on government pension overhaul
* Stock market down over 3 pct as plan rattles markets
* 10-year bond yield hit one-year high
* Societe Generale calls pension plan "blow to confidence"
WARSAW, Sept 5 (Reuters) - Warsaw's main stock index dropped by over 3 percent and bond prices fell on Thursday as foreign investors worried that changes to the pension system would undermine financial markets in the largest of central Europe's emerging economies.
Poland said on Wednesday it would transfer 121 billion zlotys in bonds held by state-guaranteed private pension funds to the state and subsequently cancel them to curb the public debt, thus reversing a reform from late 1990s.
The pension funds, which include international firms such as ING, Aviva, Axa, Generali and Allianz, would be allowed to keep their holdings of stocks, worth 111 billion zlotys at the end of July.
But even some of those stocks would finally end up in state coffers as the government plans to gradually shift the pension assets to the state 10 years prior to retirement and make the public pension vehicle ZUS the sole payer of pensions.
The government would also make further workers' contributions to the funds voluntary, most likely significantly cutting any fresh cash to the equity market.
The Warsaw blue chip index WIG20 dropped by 3.3 percent by 1236 GMT to a one-month low. The index lost about 5 percent since Tuesday close, much more that regional peers already under pressure from a broad pullout of capital emerging markets in recent weeks.
Banks suffered most, with shares in Poland's biggest lender PKO BP down by almost 6 percent, while Unicredit's Pekao tumbled over 4 percent.
The zloty fell 0.4 percent, bringing its total weakening since the announcement of the plan on Wednesday to about 1 percent.
Societe Generale called the government's plan a "blow to confidence", saying it might weaken the zloty even to 4.40 to the euro, about 2.5 percent down from the current levels.
"The government's decision is disappointing for the market and has undermined investor confidence," Societe said in a report.
"It will negatively affect liquidity on the bond market and will make it even more dependent on foreign investors, whose share on the debt market will rise in line with the cancellation of domestic-held bonds."
Societe added that the equity market would likely continue to suffer, because a significant share of current OFE members would opt to leave the system.
Bond yields also rose. Yields on 10-year benchmark bonds hit a one-year high of 4.87 on Thursday, but later retreated.
Poland managed to sell 5.7 billion zlotys in 2- and 5-year bonds on Thursday, but 2-year yields rose by about 50 basis points since last month's tender.
Moody's rating agency said Poland's pension system overhaul was broadly neutral for the country's A2 credit rating, as the improvement in debt ratios would be balanced out be a reduction in market liquidity and could undermine hurt confidence. (Reporting by Agnieszka Barteczko and Marcin Goettig; Additinal reporting by Michal Janusz; editing by Patrick Graham)
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