Oh dear. It appears some European governments never learn.
News comes to us via Dow Jones on Friday of Poland’s extremely active participation in the interest-rate and FX derivative market as recently as 2009. According to the government, these were measures designed to minimise the country’s debt servicing costs that year.
But as Dow Jones alludes, the measures also might have helped Poland to avoid breaking a crucial 2009 debt-to-GDP ratio ceiling, which came in just a hair below the 50 per cent level permissible under the European Union.
Had they broken the threshold, as Dow Jones states:
….by law the government would have had to cap the country’s budget deficit-to-revenue ratio in 2011, an election year.
And who really wants austerity measures in an election year.
More details of the swaps transacted — collectively worth a notional 11.6bn zlotys ($3.82bn) — can be found on the Finance Ministry’s website:
The Ministry of Finance informs that in 2009 was concluding two types of swap transactions:
1) Interest Rate Swap Transactions (IRS) in domestic currency,
2) Foreign Exchange Swap Transactions (FX swap).———–
Interest rate swap transactions had short maturity (up to 4 months) and their notional amount was PLN 4.8 bn. The aim of these transactions was to distribute debt servicing costs over the time within 2009-2010. As a result of concluded transactions debt servicing costs were decreased by PLN 300 m in 2009 and increased by PLN 301.2 m in 2010.
—————
In December 2009 the Ministry of Finance introduced new facility to exchange foreign currency for Polish Złoty – FX swaps. Maturities of particular transactions (up to 2 moths) were established to satisfy borrowing requirements of State budget. In 2009 transactions were concluded using EUR/PLN and USD/PLN currencies with the notional amount of EUR 1.5 bn and USD 0.2 bn that equals of acquiring PLN 6.8 bn.
These transactions consist of simultaneous exchange of one currency for another for a specific period of time with exchange rate set up at the moment of conclusion. This new liquidity management instrument allowed to use foreign currencies in order to borrow zloty.
And the critical point comes here:
Due to the fact that these transactions included assets only, and not liabilities, they had (according to Eurostat’s guidelines) no impact on the public debt level as well as on the budget deficit reported to the European Commission.
And while the transactions may have reduced Poland’s debt servicing costs in 2009 by PLN300m ($99m), it’s worth remembering they will now add a further PLN301.2 m the country’s debt servicing costs in 2010.
Nothing like putting off for tomorrow what you can do today, eh?
Related links:
About that other ‘P’ in peripheral - FT Alphaville
Behind closed doors at the ECB – FT Alphaville
Is Poland selling itself for nothing? – FT Alphaville
The EMEA debt dog – FT Alphaville