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DE RUEHWR #1217/01 2911507
ZNR UUUUU ZZH
O 171507Z OCT 08
FM AMEMBASSY WARSAW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7176
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 WARSAW 001217 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR STEPHEN WINN; COMMERCE FOR MIKE ROGERS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PL
SUBJECT: POLISH FINANCIAL SECTOR OK; THE REAL WORRY IS THE 
REAL ECONOMY 
 
REF: ROME 1247 
 
¶1. (SBU) Summary: After months of denial that worsening 
global economic conditions would have a significant impact 
here, Poland,s economic elite is wakening to increased risk. 
 Poland does not appear to share the immediate risk to its 
bank balance sheets that is crippling global finance, though 
parent banks - like Unicredito and Commerzbank - are 
transmitting weakness and uncertainty into the Polish 
financial system via their local subsidiaries.  Despite 
markets' inclination to treat Central Europe's emerging 
economies alike, Poland shares neither Hungary's 
macroeconomic imbalances nor its risk of insolvency.  Concern 
here is for the real economy, as weakness in Poland's trade 
and investment partners take their toll in the form of 
reduced production, restricted credit, and lost investment 
opportunity.  End Summary. 
 
The Financial System 
-------------------- 
 
¶2. (SBU) Over 70 percent of Poland's banking system (by 
assets) is managed by subsidiaries of parent banks based in 
the EU-15 and the United States.  The subsidiaries remain 
focused on profitable credit intermediation in the Polish 
market.  Our contacts universally agree that local banks' 
balance sheets are strong, with few illiquid assets of the 
kind weighing down global financial markets.  However, we 
have heard concern about some banks' need for continuing 
access to short-term foreign currency loans from their 
parents, used to finance longer-term mortgage lending 
(duration risk).  Non-performing loans make up only 3.1 
percent of existing credit and 90 percent of bank credit is 
covered by domestic deposits.  Moreover, the domestic market 
for assets like consumer credit and mortgages is sufficiently 
immature - mortgages came on offer only four years ago - that 
derivative instruments based on them have not emerged. 
 
¶3. (SBU) Though Polish banks are healthy, their parent 
companies are under tremendous pressure at home, pressure all 
our contacts agree the parents are transmitting to their 
subsidiaries.  Polish bankers regard orders from the home 
office to restrict commercial and real estate lending, for 
example, as a reaction to weakness in home markets rather 
than in Poland.  Orders to restrict lending in the domestic 
interbank market - rather than mistrust among local 
affiliates - have led to higher interbank rates and a 
liquidity imbalance in the generally liquid zloty market. 
One bank's chief economist told us that, though the parents 
cannot directly and openly siphon capital from their 
subsidiaries, "they can find ways".  Market-leader Pekao 
denied widespread rumors that its parent bank - Unicredito - 
had extracted over $350 million in capital from Pekao, but 
suspicion of just that kind of capital siphoning remains 
widespread. 
 
¶4. (SBU) The National Bank of Poland (NBP) introduced a 
"Confidence Package" October 14, both to restore smooth 
functioning of the interbank market and to facilitate banks' 
foreign currency borrowing needs through foreign currency 
swaps.  Though the Package is welcome and did lower interbank 
rates, our contacts agree trust and calm will not return to 
local financial markets until calm has returned to 
international markets.  They also agree that, while financial 
turmoil is a problem to manage, the real threat to Poland is 
weakness in its trade and investment partners. 
 
The Real Economy 
---------------- 
 
¶5. (U) That weakness is already sapping growth here.  Local 
economists are quickly revising downward their GDP growth 
estimates for 2009, to 3-4%, down from 4.5-5.0%.  Industrial 
production and construction are already contracting, though 
overall domestic consumption - the driver of growth in recent 
years - remains stable. 
 
¶6. (SBU) On the ground level, the story is darker.  GM's 
plant in Gliwice (protect) has already reduced production by 
15-20%.  GM Manufacturing's Managing Director fears he will 
soon have to begin layoffs, though some of his pain may be 
absorbed by higher-cost GM plants elsewhere in Europe. 
Aspect Energy of Denver had begun laying the groundwork for a 
natural gas exploration and production investment here, 
following a similar successful project in Hungary.  Aspect's 
CEO canceled his trip to finalize the project at the last 
minute, having been notified by his lenders and partners to 
 
WARSAW 00001217  002 OF 002 
 
 
halt all investment projects.  Cargill's local alcohol 
production business relies on local short-term credit to buy 
input, which it repays out of cash flow.  However, Cargill 
now reports recent difficulty obtaining what, until recently, 
was a routine loan. 
 
¶7. (SBU) Slower growth in Poland is not by itself a bad 
thing.  Into September, local economists welcomed lower GDP 
growth as relief for wage-driven inflation pressures - until 
recently seen as the principle threat to Polish economic 
stability.  However, the scale of weakness in Poland's 
partners and the uncertainty surrounding the financial crisis 
have Polish economists wondering if they are about to 
experience once again the pain of Russia's collapse in 1998. 
As the situation develops, we are particularly watching three 
vulnerabilities. 
 
Vulnerabilities 
--------------- 
 
¶8. (SBU) Currency Risk: Between 50 and 60 percent of the 
Polish mortgage market is denominated in Swiss francs (CHF). 
While lower foreign interest rates and the rising zloty made 
this a good, affordable bet for many borrowers in recent 
years, those borrowers are now paying much more for their 
loans than in August.  A homeowner who borrowed in CHF is now 
paying 17 percent more every month.  Banks too have assumed 
risk in this process since they finance their long-term 
foreign currency lending with short-term borrowing.  That 
borrowing must be rolled-over, but short-term foreign 
currency loans are increasingly expensive and hard to come by 
in the midst of crisis. 
 
¶9. (U) The Diaspora: Though good estimates are lacking, well 
over a million Poles have taken advantage of their ability to 
work in higher-wage, lower-unemployment Europe.  Should 
increasing unemployment in Britain and Ireland send Poles 
there back home, Poland would see a spike in the number of 
job seekers just as the job market here begins to soften. 
¶10. (SBU) Confidence in Markets and Potential GoP Response: 
Polling data suggests most Poles fear the crisis could come 
to Poland -- and they also doubt their government's ability 
to respond.  Politically, as the Deputy Mayor of Gliwice told 
CG Krakow, Polish leaders know that Poland will suffer some 
degree of pain in the crisis, but they do not want to sow 
panic among workers by announcing that.  However, some 
bankers have complained to us privately that by keeping quiet 
to avoid panic, the government is actually increasing 
uncertainty and losing credibility. 
 
Comment 
------- 
 
¶11. (SBU) Poland is no Iceland, nor is it Hungary.  With its 
conservative banking subsidiaries, small mortgage market, and 
strong macroeconomic fundamentals, Poland is not likely to 
suffer severe direct effects of the global financial crisis. 
Growth will slow exports, investment, and domestic demand 
decline, though those effects could be moderated by zloty 
depreciation and production shifting from higher-cost Europe. 
 We will keep a close eye on three X-factors - Poland's 
European Diaspora, Swiss franc-denominated mortgages, and 
government management of uncertainty - but for now, we expect 
to see ahead old-fashioned, unpleasant economic weakness. 
QUANRUD