Poland And Greece: Opposite Ends Of The Risk Spectrum
We have previously highlighted on Risk Watchdog how the aftermath of the global financial crisis has exposed the structural imbalances in many developed economies, while also singling out those emerging markets which are in a fundamentally sound position to exploit the global economic recovery. Poland and Greece are certainly two prime examples at opposite ends of the risk spectrum.
The diverging fortunes of Poland and Greece have once again come into focus following the positive reaction of Polish financial markets to the government’s 2010-2011 fiscal plan, at a time when Greek treasury yields have surged to their highest levels since the run up to euro adoption. Though Poland is an ‘emerging’ non-eurozone economy, its sound macroeconomic fundamentals, robust banking sector and strong coalition government, have comforted foreign investors with credit spreads consequently collapsing from their Q109 peaks.
Meanwhile, proving that eurozone membership and ‘developed’ economy status is no panacea for entrenched fiscal profligacy, Greece continues to struggle in assuring investors that it can pay down is swelling public sector debt pile. That the Greek 5-year CDS spread continues to trade ever further outside of its Polish counterpart is certainly a scathing indictment of Athens’ inability to get to grips with the public finances, and clean up its shoddy record on statistic collection.
While Poland is by no means immune to ructions in global financial markets, we nonetheless believe that a credible deficit reduction program, limited private sector deleveraging requirement and strong growth potential will continue to differentiate this economy from its more precarious peers. At the same time, the outlook for Greece continues to deteriorate. Even should Athens secure some form of financial bailout from other eurozone states, the road to recovery will be both long and painful. Not only will unpopular budget cuts risk sparking violent public protests over the medium term, but the failure to raise competitiveness and the quality of the business environment in recent years will anchor the Greek economy on a lower long-term growth trajectory, while Poland continues to ascend the convergence ladder.