For anyone who has been following world economic news even passively, it seems that the situation is changing nearly every day. Even in Poland, the month of October began with reassurances that the country wouldn’t be hit with the fallout of the U.S. mortgage crisis. Then, as the crisis hit Europe, suddenly Iceland’s or Hungary’s woes were beginning to have a real impact on the Warsaw Stock Exchange. Currently, Poland’s leaders are revisiting strategies for joining the Eurozone (now planned for 2012), while Poland’s central bank’s Monetary Policy Council is projecting the country’s 2009 economic growth at a low 2.8 percent – far below the 4.8 hoped for by the government and 2007’s 6.5 percent. Economic experts forecast a bit of a compromise of 3.9 percent, which is still a far rosier outlook than that of most of the rest of Europe.
At the end of the month, Deputy Prime Minister and Minister of the Economy Waldemar Pawlak was eager to calm financial nerves, stating that he does not believe that Poland is experiencing a real financial crisis, though he didn’t rule out the possibility of using state aid to help financial institutions; an unlikely move, given that on the 28th the Polish cabinet passed a bill aimed at strengthening liquidity in the banking sector. Nonetheless, the zloty lost as much as 17 percent against the Euro in October, and with the dollar paradoxically on the rise, many are beginning to feel the pain of paying more for American imports. So, is the glass half-empty or full of gold? Should we withdraw our funds from PKO or keep spending as usual? Below, Krakow Post‘s Magdalena Matyjaszek spoke to several Polish economic experts to get their views, while Post staff interviewed local business owners.
While many headlines announce that deposits placed in Polish banks are perfectly safe, people might soon prefer to buy a safe and lock their money up at home rather than keep it in a regular account. Such a reaction may occur as a response to European concerns about the economic crisis in the United States and its contagious psychological consequences.
Since last month we can observe an astonishing reaction to the global financial condition in the Polish media. While most European countries reacted by organising negotiation boards and international panels in order to decide what would be the adequate reaction to the unprecedented situation that European banks are facing, the Poles seem to have greater problems. Shortly after a brief period of panic and the chase for comforting explanations as to why the Polish banking sector is, according to the experts, perfectly safe, we saw an embarrassing conflict between Prime Minister Tusk and President Kaczynski. Furthermore, we have learned that Polish trade might be exposed to some troubles as our leading partners, such as Hungary, are experiencing a monetary storm which may cause some disturbances.
Marek Rogalski, chief analyst from the First International Traders Brokerage House based in Warsaw, puts it in plain words:
“The economic slowdown in our neighbouring countries will undoubtedly set its stamp on our exports’ dynamics as potential markets shrink. As a result, companies will be forced to move a part of production to the local market. Nevertheless, it won’t stop revenues decreasing as an outcome of the rise of the local competition and a drop in margins. Some smaller companies may not keep up with the competition, resulting in consolidation in certain branches. It is necessary, however, to distinguish between the problems seen in Germany from those in Hungary, or even Ukraine. In the first instance, we have a crisis in a developed economy. In the second we have witnessed central structural problems for the past 13 or so years, which escalated again thanks to current global trends. The situation in Ukraine is even worse, as the economic troubles may tip the country into the Russian sphere of influence. I think that because of this the co-organisation of the Euro 2012 tournament may have to be rethought, which will of course have a negative effect on Poland’s eastern regions, which in turn have seen underinvestment. The western provinces of Poland would then gain more investment, as most probably Germany would take Ukraine’s place in its organisation.”
Since the Poles have observed the beginning of the credit crunch on foreign markets and gradually examined it from personal experience, their view on the condition of the banks has been largely built by the optimistic scenarios that have dominated the press. “Our financial institutions weren’t present on the American subprime credit market and the proportion of bad debts in the entire sum of credits taken was relatively small. Additionally, relying on interior consumption rather than on export gives us a chance to avoid the shrink of the foreign markets,” Marek Rogalski confirms.
No matter how reassuring the expert’s analysis is, there is no doubt that the situation of the Polish banking sector is constantly under the supervision of domestic monetary institutions. The authorities are convinced that the Polish banking supervision is recognised as more restrictive that the American one. “In Poland, banks didn’t use any sophisticated financial engineering,” explains Dr. Andrzej Stopczynski, managing director of the Banking Supervision Division of the Commission of Financial Supervision: “They made a profit from simple banking activities, such as attracting clients’ deposits and handing out loans. In the last few years, our mortgage market was developing at an average pace of 40 percent per year. Fast, although compared to GDP, the proportion of these borrowings remains slightly above 12 percent. As supervisors we check the market thoroughly and try to impose standards that protect the sector and, essentially, its clients. An example of this is the ‘S’ recommendation from 2006, which dealt with mortgage lending in Polish zloty and foreign currency. Presently we are working on a new recommendation concerning credit ratings, not just for mortgage lending purposes.”
Recently, an amendment to the Bank Guarantee Fund bill has been proposed and now the Polish parliament is working on boosting bank deposit guarantees to 175,000 zlotys ($65,790). These regulations might be adjusted within a year. The government will soon decide on granting help to any bank that should require it. In addition, the Bank Guarantee Fund declares that in case of a bank declaring insolvency, the Fund is committed to returning a total sum amounting to less than 1,000 euro. In turn, sums from 1,000 to 22,500 euro are paid back to 90 percent. It is worth mentioning that the majority of Polish deposits are fully guaranteed, as they do not exceed 1,000 euro. As a result, Poles should not be afraid of placing their money in their bank accounts; the new regulations should convince Poles from a psychological perspective.
Prof. Malgorzata Zalewska, head of the board of the Bank Guarantee Fund and recently appointed head of the European Forum of Deposit Insurers (EFDI) research group, stated, “looking at the Polish savings structure, raising the limit up to 50,000 Euro (approx. 175,000 zlotys) has a particular meaning in psychological terms. It should be underlined that the vast majority of Polish depositors place smaller sums than 1,000 euro (approx. 3,500 zlotys) in their accounts. And therefore, it means that their reserves are all fully guaranteed. Raising the limit will undoubtedly go a long way towards a sense of greater security among depositors.”
Bankers claim that mortgages are relatively new products in the banks’ offer and so far Poles have been more reluctant to take these loans than Americans. This situation has its roots in the early 90s, when serious regulations were implemented by the supervisory institutions. Dr. Andrzej Stopczynski, from the Banking Supervision Division from the Commission of Financial Supervision, clarifies:
“Over the past few years banks have been loosening their criteria on lending. From our analysis from June this year it is clear that some of the banks went too far and did not play it safe in the lending market. Examples of this are due to banks demanding lower net monthly salaries after any outstanding loan payments or even lending 100 percent of the property’s value. Because of this we have asked banks to review their lending policies.
“It has to be said, however, that taking out a mortgage was never possible under the same terms as it was in the U.S., without having any income or equity. Additionally, Polish banks do not have to fight for clients like they do in the States, as mortgage retail still stands high in Poland.”
Nevertheless, when it comes to more sensitive issues such as getting a bank loan, it becomes a very complicated operation. The conditions for receiving a loan or a mortgage are getting more and more restrictive. Banks impose various policies and look for a precise client with as many possible sources of financing the loan as possible, such as financial protection and a high salary (even for a meagre loan).
The credit crisis has also negatively affected the real estate market and has resulted in considerable drops in prices. Owners who cannot afford to pay off their mortgages are forced to sell apartments at a substantially decreased rate. Only fortunate people with capital that was taken in the nick of time from the stock exchange can benefit from the situation.
Even if one gauges that the Polish market is in comparatively robust form, there are many factors suggesting that it’s not all plain-sailing for the Poles. Assessing the position of a Pole on the British market and being asked about the urge to come back to Poland regarding the miserable situation on the Isles, Konrad, an architect living in Edinburgh for the last two years, does not seem to be particularly attracted by the Polish market.
“The ‘credit crunch,’ despite its real impact on everyone’s life, has currently become more of a press frenzy than something that can be clearly observed in reality. At the moment, the crisis has a more social character than an economic one. So, it almost loses its meaning, but becomes a topic of all kinds of chat and small talk.”
His observations show the theatrical aspect of the crisis and the repercussions that are more visible for minority groups. “The credit crunch seems to be the next riveting slogan that the press enjoys displaying in the headlines. This feature of the British media doesn’t make those problems any less important or nonexistent, but strengthens them in a specific way – most of our friends who have been made redundant recently lost their jobs at almost the same moment. This looks like a panic reaction of some company directors caused by repetitive TV and paper announcements of a great and total disaster, which in reality seems to be the gradual process of an economic slowdown. Not that I would like to ignore the risk of recession, but my observation is that at its present stage it has a smaller economic impact on peoples’ lives (higher food prices, lower property prices) than one may think, and most of its severest results are caused by panic. There aren’t many situations in which Polish workers are being forcefully made redundant and queuing at airports to return back home. Our friends who were considering moving back to Poland gave up after hearing their Polish salary proposals, and the British economy doesn’t seem to be bankrupt.”
Regardless of the relatively favourable position of the Polish financial sector, Poles should be very prudent in anticipating possible scenarios. Apparently, if only seven percent of frightened banks’ customers were to withdraw 100 percent of their capital from European banks at roughly the same period of time, it would be enough to put our old continent’s stability to ruins. It seems that the psychological aspect of the recession provides a clue to this situation.
Cracovians Speak Out
In the October 26th issue of the New York Times, in a article titled “Credit Crisis Slows Economy in Once-Hot Poland,” Nicholas Kulish writes: “Experts say there was a consensus locally that Poland would not be affected by the crisis, and that membership in the European Union would buffer it from the worst of the shocks. That consensus has begun to break down.” The Krakow Post spoke to two local business owners to get their views on the situation.
Ilona Kostrzewska, co-owner of the Globtroter Hotel:
KP: Have you noticed a change in your business since the “financial crisis” began?
IK: In general, we have noticed the number of reservations dropping. For example, last year by now we were fully booked for New Year’s Eve, while this year there are still a few empty beds left.
KP: Do you think this is specifically because of the global economic situation, or are there other factors?
IK: I think it’s several factors working together. Several of the cheap flights to Krakow have been cancelled, and [as a result] we had people cancel their bookings. Because most of our guests are from the UK, and they felt the financial crisis earlier, there has been a drop because of that.
KP: Do you think this is something that will become permenent? Have you made any adjustments in your business?
IK: I believe that this is temporary, and it will be fixed, but it will not be immediate; perhaps next year. But in general, I think Krakow is losing some popularity and that is affecting us too. We have not cut any costs yet but we have begun to think about it. Because we are a small family business, there are not that many costs to cut, but it is something we’ll need to think about.
Radoslaw Fronc, owner of Miód Malina restaurant:
KP: Have you felt that the financial crisis has affected your business in any way?
RF: It’s too early to say. Because we’re very much tied to tourism, the higher zloty affected us in the summer. But because [eating in restaurants] is a luxury, we will probably be affected sooner or later as people spend less. Overall, this year’s season was weaker than normal, but Miód Malina still managed to do well, gaining even about 13 percent so far this year.
KP: Have you noticed a reduction in American or English clients since the crisis began?
RF: There were definitely far fewer American guests at our restaurant this summer, but I think that’s because of the low dollar and high zloty.
KP: Have you changed any part of your business as a reaction to the crisis?
RF: We have always optimised our costs, from the beginning – it is the normal functioning of the business. So further optimising of costs is not necessary at this stage. I think businesses which have not optimised their costs from the beginning, and are trying to do so now, will probably be in trouble.