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The Warsaw Voice » Business » August 26, 2010
The Crisis: A Lesson Well Learned
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The Crisis: A Lesson Well Learned
August 26, 2010   
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Marek Belka, governor of the National Bank of Poland (NBP), talks to Andrzej Jonas and Andrzej Ratajczyk.

In an interview published recently in a Polish daily newspaper, you commented extensively on the government’s financial policies. Does this mean that you see your role as central bank governor in terms of reviewing the government’s economic policy?
Yes, to some extent. I think the NBP governor is in a way obligated to evaluate the country’s macroeconomic condition. He doesn’t necessarily have to go into the particulars, reviewing detailed proposals regarding the structure of spending or taxes, for example. But nobody should be surprised at him speaking out about macroeconomic issues.

Do you think the long-term financial plan recently proposed by Finance Minister Jacek Rostowski meets Poland’s financial needs? In other words, is a cautious, evolutionary approach focused on revenue rather than spending the best solution right now?
I don’t think Poland’s current situation requires any radical steps. Those arguing that Poland’s public finances are in disastrous condition—and that the economic situation in the country is supposedly getting closer to that in Greece—betray a lack of professionalism and a lack of knowledge on what has happened, what is happening and where we are in all this.

This doesn’t alter my feeling that the plan announced by the government does not provide a complete answer to the challenges Poland faces. I expected the government to take advantage of the substantial (and greater than projected) improvement in the economy and decide on more ambitious measures in terms of spending. I expected measures reducing the public finance deficit to 5 percent of GDP. That would be a good result. The government’s proposal suggests the deficit will be about 5.5 percent of GDP. This calls into question the possibility of painlessly reaching a 3-percent deficit in 2012. For this to happen, the economic situation would have to become much better than we predict today. Meanwhile, the finance minister shouldn’t be an optimist.

However, I repeat, the situation is not dramatic. Poland is not having any problems with financing its debt, or rather its borrowing needs, because that is the ultimate criterion of a stable situation. The current deficit offers an incentive to look for a few more billion zlotys of savings in terms of spending. That would give Poland’s finances a greater degree of security and would be a sign for international markets that the Polish government really is acting vigorously.

Wouldn’t this increase Poland’s credibility and help attract more foreign capital?
Obviously. I think what the government has declared is the absolute minimum that the markets expect. This is suggested by the reaction of two rating agencies which decided that the long-term financial plan’s guidelines were enough to not change Poland’s rating. On the other hand, they aren’t ambitious enough for the rating to be raised.

Today the most important thing for foreign investors is that Poland is a country which, due to various circumstances, including measures undertaken or abandoned, has avoided a recession. This year the Polish economy will grow at a rate of over 3 percent. That’s important to foreign investors.

Not long ago there was a debate in Poland on whether the central bank should get involved in stimulating the country’s economic development or concentrate exclusively on monetary policy. What is your view? As the central bank’s governor will you undertake measures to support the economy?
Yes, of course. The NBP’s fundamental task is to maintain stable price levels, which means fighting inflation. Another important task is to support the government’s efforts to foster economic development, of course as long as this is compatible with the central bank’s fundamental task. This doesn’t mean that the NBP should artificially lower or raise interest rates.

Should the central bank influence the zloty exchange rate?
No. I want to state firmly that the NBP pursues an inflation targeting strategy and not an exchange rate strategy. These two goals can sometimes contradict each other. We don’t have any target rate, but we do reserve the right to occasional interventions when we believe that the currency market has been destabilized. Excessive exchange rate fluctuations are harmful to the economy. In this sense, we can support the economy. Another form of the NBP’s support for economic development are measures undertaken in collaboration with other institutions to maintain a high degree of stability in the financial system, especially the banking system, in Poland. Any crisis in the banking sector would be the worst thing imaginable for the country’s economic development.

Doesn’t the prospect of Poland joining the euro zone mean that some interest will have to be shown in the zloty’s exchange rate?
First of all, we still have a long way to go before we adopt the euro. But of course the price of the zloty is too important to ignore. That’s why we are observing the markets and if we notice anything amiss about the price, any dangerous fluctuation, we have the necessary instruments to intervene and stabilize the situation. In principle, though, such measures are supposed to be the exception, not the rule.

Do you support Poland’s speedy adoption of the euro? When could this take place?
As a point of principle I don’t speculate on the date of euro-zone entry. I’m sure we will adopt the euro at the best moment for Poland.

The global crisis has revised some patterns of thinking about economic mechanisms and financial markets. What are your thoughts on how the markets behaved in the crisis?
They are many. Though I never uncritically accepted that markets are always effective, reality turned out to be more complicated. The crisis has shown that not only markets but the entire financial system can be ineffective. With regard to our region, the crisis has made it evident that the economy constitutes a whole. Even if there is order in public finances, this is no guarantee that the economy won’t experience some serious turbulence if a substantial lack of equilibrium occurs in the private sector. The Baltic states are a case in point; they had very low public debt and budget deficit indices, but huge imbalances grew in the private sector there. The result was a huge recession in those countries.

Does the course of the financial crisis and the results of measures undertaken to combat the effects of the crisis mean that we now have an operational global early warning system? Has the crisis taught the financial world anything?
The crisis has certainly taught us a great deal. It seems that a global economic disaster was prevented mainly by the coordinated activities of the G-20 countries, or in reality several of the world’s biggest economic powers. These were unprecedented undertakings due to the state intervention that broke all kinds of free-market rules. In fact the key moment was not fiscal stimulation but the joint declaration of the G-20 leaders after the collapse of Lehman Brothers bank that they would not allow any other key financial institution to go bankrupt. That could have spelled the end of capitalism, or at least the end of market discipline. That’s very serious, but in an emergency situation we are prepared to make sometimes drastic decisions. For example, to save our lives we agree to a leg amputation. This is what happened after the Lehman Brothers bankruptcy. If the Americans had let the next endangered giant organization, AIG, to go under, it’s possible that no large financial institution in the world would have survived.

But isn’t it true that completely anti-system measures create a new system?
Yes and no. Nobody in the world today is thinking about a return to socialism. Nobody believes that the state taking over banks in Ireland or Britain means these banks will stay nationalized. It’s obvious they were taken over to save them from bankruptcy, to prevent a domino effect. Once they are healed, they will be sold on the market. Since there is a problem, some kind of system needs to be introduced that would prevent such a crisis from occurring again. We need regulations. We know that one of the causes of the crisis was that the financial sector was inappropriately liberalized in the 1980s and 1990s. Today we know we need to go back to some of those earlier regulations. Right now there are several concepts that are slowly being put into practice. This is not a good time for banks, though, because they don’t know what new regulations will appear and they don’t know how to behave. That in itself is dangerous for the development of the economic situation. In any case, we are building some kind of new system of regulation. That’s something that cannot be done using market solutions, unfortunately.

What is your opinion on the regulations in place in Poland? Do you agree that the Polish banking system didn’t collapse precisely thanks to rather restrictive regulations and a degree of backwardness compared to the most developed markets, such as the lack of sophisticated financial instruments?
First of all, the regulations in force in Poland are mostly not a local product but the effect of agreements on the international arena. But it’s true that supervisory regulations are partly the result of the work of national supervisory bodies, in Poland’s case the Polish Financial Supervision Authority (KNF). To some extent, the S recommendation which came into force in 2006 restricted the scale of dangerous growth of loans denominated in foreign currencies. The T recommendation is being introduced now, requiring banks to thoroughly check clients applying for loans. The introduction of more regulations aimed at restricting lending in foreign currencies is being discussed as well. In other words, regulations in Poland certainly played a certain role, while the KNF is quoted as an example of good banking supervision.

As for sophisticated financial instruments, I don’t think these should be perceived as being more innovative or better than traditional ones. I think this is one of the problems of the global financial system, which at one point began to function for its own sake. Most of those “financial innovations” didn’t yield any added value. Actually, they served to bypass regulations or to avoid paying taxes. I say “no thanks” to such innovation.

Views have been voiced recently that too much foreign capital in the Polish banking system may not be good for the economy, especially in a crisis. Do you agree?
There were certainly fears that, to bolster their financial situation, foreign banks would withdraw money from their subsidiaries. This applied not only to Poland but other countries in the region as well. Luckily these fears came to nothing. Nothing of the kind happened. No major foreign bank withdrew from these markets. This proved that banks treat their investment in the region as long-term investment.

What do you think of PKO BP bank’s potential takeover of Bank Zachodni WBK, which is currently owned by Allied Irish Bank?
I think we need to wait for the matter to be resolved and not get carried away by emotions. All the more since it’s not set in stone that PKO BP is the favorite in the race to take over this bank.

How do you rate the present condition of the Polish banking sector?
Very highly. This has been confirmed by the results of stress tests in which PKO BP made a very good impression compared with European banks.

Seeing as the Polish economy is developing much faster than the rest of Europe and the Polish financial system is stable and secure, could Warsaw become a regional financial hub?
I think the financial market institutions we have managed to build in Poland, namely the stock exchange and financial supervision, are good enough for foreign companies to be quoted on the Polish market. But turning Warsaw into the financial hub of Central and Eastern Europe requires time. It’s a process. Poland isn’t an economic powerhouse; it is a medium-sized economy. Even Germany, though it has much greater economic potential than Poland, is having a hard time turning Frankfurt into a true financial hub for Europe, since there’s London’s City and its long tradition to contend with. I do think, however, that Warsaw’s importance on the European financial market will grow.
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