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Apr 15, 2009 | 21:00 GMT

4 mins read

Poland: Tapping the IMF's Flexible Credit Program

BARTEK WRZESNIOWSKI/AFP/Getty Images
Summary
Polish Prime Minister Donald Tusk said April 15 that his country will apply for a line of credit through the International Monetary Fund's (IMF) Flexible Credit Line program, designed for countries with solid economic fundamentals that are being affected by the global recession. The move is meant to boost investor confidence in Poland, since a country must have a strong economy to get approval from the IMF.
Polish Prime Minister Donald Tusk announced on April 15 that Poland will apply for a 15.5 billion euro ($20.5 billion) credit line from the International Monetary Fund's (IMF) Flexible Credit Line (FCL). The purpose of the credit line would be to strengthen the zloty, which has depreciated around 25 percent since September 2008, and to reassure investors that the Polish economy is sound enough to qualify for the FCL. IMF chief Dominique Strauss-Kahn said April 15 that the loan "is just a kind of insurance policy" and that Polish economic fundamentals are strong. Poland's decision to tap the FCL comes as no surprise to STRATFOR. Following the recapitalization of the IMF at the G-20 conference, STRATFOR forecast that along with Mexico, Poland would be the first in line to ask for the "no-strings-attached" FCL loan. The FCL is a new facility, established March 24, through which the IMF can grant bridge loans to states facing short-term liquidity crunches, but otherwise have firm economic fundamentals. Essentially, it is a way to provide credit without asking for any of the economic reforms usually associated with IMF loans. A number of fundamentally strong economies can ask for the credit line without fearing that it would be a signal of economic surrender. For Poland, the issue is one of boosting investor confidence. Since the beginning of the financial crisis, Poland has been lumped together with Hungary, the Baltic States and Romania in the category of European emerging markets — a categorization that amounts to the kiss of death in the current economic crisis. Investors fearing that all of Central Europe is suffering as much as Hungary have begun pulling cash out of the region, dragging various currencies down. Thus, the FCL is a security blanket for Poland amid this general loss of investor confidence. It will also show international investors that Warsaw is able to qualify for the IMF facility that requires strong economic fundamentals and a well-managed monetary policy. Whether Warsaw actually uses the money from the facility is ancillary; it is the fact that the IMF had enough confidence in Warsaw to give it a loan without normal stringent conditions attached that is the issue. Poland could well use the facility to shore up its international reserves and insulate itself from the projected drop in gross domestic product growth to 1.1 percent in 2009 (compared to 4.8 percent in 2008). Polish industrial output fell by 14.3 percent in February year-on-year after a 15.3 percent drop in January. But the situation in Poland is indicative of the wider European problem of slumping demand for manufactured exports; it is not an exclusively Polish problem. Poland's banks are in a generally better situation than those of its fellow Central European neighbors, such as the Baltic States and Hungary. Swiss franc-denominated mortgages and consumer loans make up less than a third of the total loan portfolio in Poland. While this is still a source of concern, it is nowhere near as dire as in Hungary, where since 2006 more than 80 percent of all mortgages were denominated in Swiss francs and more than 40 percent of all loans are in Swiss francs (the rates of Swiss franc-denominated loans in Romania, Bulgaria, and Croatia are close behind). The next potential applicants for the FCL loan are Brazil, South Africa and South Korea — all negatively affected by the financial crisis, but fundamentally strong enough to be trusted with a line of credit. The Czech Republic was thought to be in the running for the FCL as well, but immediately after the Polish announcement, the Czech Finance Ministry said Prague had no need for the IMF credit line. Prague has instead offered to help recapitalize the IMF by giving $1 billion — a move intended to build up confidence in the Czech economy, but one that puts Prague into the group of countries giving a loan rather than taking one out.

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