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The Warsaw Voice » Business » January 30, 2008
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Crash Averted
January 30, 2008 By Andrzej Ratajczyk   
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Investors on the Warsaw Stock Exchange started buying shares early last week, making prices rebound after a steep fall, as global capital markets escaped the crash predicted in some ominous forecasts.

Jan. 21 was "Black Monday" for trading floors worldwide, with a wave of selling triggered by a gigantic slump on Asian markets. The Bombay Stock Exchange nose-dived 7.4 percent, Hong Kong's Hang Seng index went down 5.5 percent, and the Singapore market lost more than 6 percent. In Europe, the biggest markets dropped by 5 or so percent, with the Frankfurt bourse plummeting more than 7 percent. This was the biggest crisis since the 9/11 attack on the World Trade Center in 2001.

The Warsaw Stock Exchange was not doing any better. Its WIG20 blue-chip index shed 6.7 percent, the most since April 2000. The decline was a part of a several-week downward trend. Someone who invested their assets in an aggressive mutual fund investing in Polish stock at the end of last year has lost an average of 20 percent by now, or even 30 percent if they made their purchase in mid-2007. This explains why investors started to withdraw from the market in large numbers recently in order to offset their losses.

But the downturn did not last long. The U.S Federal Reserve Jan. 22 cut interest rates by 75 basis points, making the key rate fall from 4.25 to 3.50 percent. That decision boosted investor optimism in both the United States and Europe. The mood among Polish investors also improved as the main WSE indexes gained around 4 percent Jan. 24, with sizable trading volumes.

The uncertainty on global trading floors has to a large extent been caused by a crisis on the U.S. real estate market and the expected recession in the United States, the world's biggest economy. Further developments in the world economy are anybody's guess, and the uncertainty is making investors sell their stock. Although most respected economists say a global crisis is unlikely, some investors are more pessimistic. For example, billionaire investor George Soros has said in an interview for Austrian daily Der Standard that Europe is facing a recession. Some Polish analysts are also pessimistic about the latest turmoil on the world's trading floors.

WSE President Ludwik Sobolewski says many of these statements are unjustified and local analysts are "unnecessarily fueling a mood of uncertainty." Investors here are paying too much attention to what is happening overseas, Sobolewski said.

The Polish Chamber of Commerce (KIG) has also voiced its surprise with forecasts of a major crisis on the Polish financial market. "Such irresponsible statements, which are often not supported by any economic rationale, threaten the stability of an emerging market like Poland," said KIG head Andrzej Arendarski. "The turmoil on the Warsaw Stock Exchange is not related in any way to what is happening in the Polish economy; it mainly results from the atmosphere of unjustified panic and a sense of uncertainty among investors. The Polish economy's ties with the U.S. economy are too loose for the expected recession to be transferred to Poland."

Leszek Balcerowicz, former finance minister and ex-governor of the National Bank of Poland, the central bank, voiced a similar opinion. "Talking about a crisis and seeking analogies to past crises is going way too far," he told the Dziennik daily. He added that the current situation on global markets was a result of an overheating of the U.S. economy. Balcerowicz said the decline on stock exchanges worldwide represented the contraction phase of a business cycle. In recent years, interest rates in the United States were lowered too much, he says, which resulted in a fast growth of money supply and encouraged investors to look for new investments. But some of these investments turned out to be too risky, bringing about the current problems.

Although the U.S. economy is growing more slowly now, it will keep growing, Balcerowicz said. Even if the downturn is substantial and affects other countries, including Central Europe, Poland is unlikely to be influenced significantly due to its limited ties to the U.S. economy.

Central bank chief Sławomir Skrzypek spoke in a similar tone. "The present situation raises a lot of anxiety among investors," he said. "However, the fundamentals of the Polish economy are very strong, and I hope the emotions raised by the latest developments will subside gradually."

Prime Minister Donald Tusk also tried to calm investors. "The situation on the WSE above all reflects the developments in the United States, as well as other stock exchanges worldwide," he said. "The condition of the Polish economy gives no grounds for any nervous moves, so in the long run I'm not worried about stability on the Warsaw trading floor." Tusk said his government would make a series of decisions "friendly to investors."

The Polish economy is growing faster than most other economies in Europe. Despite a slight deceleration in the growth of the basic macroeconomic indicators, there is every reason to expect that the economy will grow almost 6 percent this year, while investment is expected to increase by 17 percent.

"Poland has good prospects for further economic growth, and its growth in 2008 will continue at a healthy 5 percent," Paul Thomsen, head of the International Monetary Fund mission in Poland, told reporters. However, the IMF warned that inflationary pressure might remain high in the near future, largely because real wages are growing faster than productivity. The IMF predicts that inflation will exceed 2.5 percent at the end of this year, overshooting the upper limit of the 3.5-percent inflation target for most of the year.

In order to sustain the economic upswing in the mid term, Thomsen said, the government should launch reforms. It should curb the mounting wage and inflationary pressures and accelerate structural reforms. The IMF applauded the government's plan to lower taxes, but the priority should be given to cutting the budget deficit, Thomsen said. The Polish government needs to cut expenditure and streamline its social security programs, the IMF said.
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