Polish Central Bank Warns of Domestic Commercial Property Bubble

More example of what  I call as:  global political or mainstream institutions or establishments, CANNOT deny the existence of bubbles anymore. So their recourse has been to either downplay on the risks or put an escape clause to exonerate them when risks transforms into reality

From Bloomberg: (bold mine)

Poland’s commercial property market faces “growing imbalances” as developers add new projects even as supply outstrips demand, the central bank said.

Commercial real-estate prices in the European Union’s biggest eastern economy continued to decline “slowly” in the third quarter, while the vacancy rate in rented office space has increased to almost 14 percent in Warsaw, the Polish central bank said in a report today.

“The office market has experienced a boom in space growth, which has led to a significant vacancy rate,” the bank said. Even so, “developers continue to build new offices.”

Poland, the only EU member to avoid recession after the global financial crisis in 2008, has attracted a flurry of real-estate investment in recent years. Warsaw trails only Paris, London and Moscow among European markets for new office development, Los Angeles-based consultancy CB Richard Ellis Inc. said in a report.

Office stock in Poland’s capital stands at 4.4 million square meters with more than 660,000 square meters under construction in the third quarter, CBRE said. The biggest projects include Warsaw Spire, developed by Belgium’s privately-held Ghelamco Group CVA, and Warsaw-listed Echo Investment SA’s Q22.

How this CRE boom has been funded has not been indicated in the above article, but my guess is that this has been channeled through the banking system. 

Poland’s economy nearly suffered a recession in 4Q 2012, so the Polish central bank implemented aggregate demand policies by aggressively slashing policy rates from 4.75% to 2.5%. This has boosted statistical GDP in 2013 but given that negative inflation rates has recently emerged (possibly reflecting on the slowdown of the property sector as well as a deceleration or even possibly an inflection point in GDP), the central bank cut official rate again in Sept 2014.

The banking sector’s balance sheet continues to expand especially over the past few months, and this seem to have been reflected on money supply growth.

Given the downturn in real estate demand as measured by property prices and an increase in vacancy rates, the typical reaction should have been to ease on the build up of supply.  But developers continue to intensely build. This may be due to hopes for a recovery and or that this may be about Ponzi finance dynamics.

For the latter, in order for leverage companies to have access to funds they would need to show financing companies that they are embarking on new projects from which the latter would fund. Developers get the money and payback interest rate charges and use the rest for the new project. Of course, developers hope that demand eventually picks up where they can unload existing inventories. Financers, on the other hand, would need to keep financing them otherwise any partial souring of loans can transform into wholesale default. This what constitutes as a debt trap.

I am not familiar with Poland so this is just a conjecture from what seems a divergence—slowing demand for real estate market, but booming loans and inventory accumulation. 

Well it’s not just a slowdown in the CRE market but also the housing market.

And here is the most interesting portion. Almost half of Poland’s home mortgage have been financed from foreign currency loans.

From the ever bullish despite all the risks, Global Property Guide:

The foreign currency-denominated proportion of housing loans (including Swiss franc loans) rose from 9% in 1999, to 50% in 2001, and remained at 47% at end-July 2014, according to Polish central bank, Narodowy Bank Polski.

However, foreign currency-denominated loans have been decreasing in recent months. In July 2014, foreign currency loans dropped 6.8% y-o-y, while Polish zloty loans increased by 15.9%.

The number of the total outstanding loans in July 2014 increased by 3.9% to 343,502. Of which, 180,849 (or 53%) were Polish zloty-denominated; and 162,653 (or 47%) were foreign currency-denominated.

Impaired loans rose 10.61% to 10,876 in July 2014 compared to a year earlier. Of which, 6,677 were Polish zloty-denominated (which increased by 3.2% y-o-y); and 4,198 were foreign currency-denominated (which increased by 24.9%).

Iceland’s crisis has been partly due to the banking system’s massive exposure to housing mortgages financed in foreign currency.

As of the moment, the Polish zloty has been weakening against the US dollar (since July 2014), has been rangebound with the euro  and the Swiss franc (since 2012; the franc is pegged to the euro at 1.2)

If impaired loans has already been rising in domestic currency terms, how much more if currency volatility gets magnified?

The alarm bell sounded off by the Polish central bank hardly represents a bullish sign but one of an environment of rising risks already being resonated by many other political agencies worldwide.

Poland Government Seizes Half of Pension Funds

Desperate debt burdened governments will resort to the brazen confiscation of the savings of their constituents. 

In the case of Poland almost half of private pensions have been nationalized.

Notes the Zero Hedge (bold original)

By way of background, Poland has a hybrid pension system: as Reuters explains, mandatory contributions are made into both the state pension vehicle, known as ZUS, and the private funds, which are collectively known by the Polish acronym OFE. Bonds make up roughly half the private funds' portfolios, with the rest company stocks.

And while a change to state-pension funds was long awaited - an overhaul if you will - nobody expected that this would entail a literal pillage of private sector assets.

On Wednesday, Prime Minister Donald Tusk said private funds within the state-guaranteed system would have their bond holdings transferred to a state pension vehicle, but keep their equity holdings.  The funds would effectively be left with only the equities portions of their assets, even this would be depleted, and there will be uncertainty about the number of new savers joining.

But why is Poland engaging in behavior that will ultimately be disastrous to future capital allocation in non-public pension funds (the type that can at least on paper generate some returns as opposed to "public" funds which are guaranteed to lose)? After all, this is a last ditch step which no rational person would engage in unless there were no other option. Simple: there were no other option, and the driver is the same reason the world everywhere else is broke too - too much debt.

By shifting some assets from the private funds into ZUS, the government can book those assets on the state balance sheet to offset public debt, giving it more scope to borrow and spend. Finance Minister Jacek Rostowski said the changes will reduce public debt by about eight percent of GDP. This in turn, he said, would allow the lowering of two thresholds that deter the government from allowing debt to raise over 50 percent, and then 55 percent, of GDP. Public debt last year stood at 52.7 percent of GDP, according to the government's own calculations.

To summarize:

1. Government has too much debt to issue more debt

2. Government nationalizes private pension funds making their debt holdings an "asset" and commingles with other public assets

3. New confiscated assets net out sovereign debt liability, lowering the debt/GDP ratio 

4. Debt/GDP drops below threshold, government can issue more sovereign debt

The seizure of private sector savings to lower debt levels only whets government’s appetite to go into a spending binge.

The Polish government’s spending extravaganza as seen via chronic budget deficits

 

Nationalization of pensions funds means that the Polish government sees a growing risk of diminished access to external financing as external debt has been swelling to finance lavish government spending habits.

The actions of the Polish government appear to have slammed her equity markets as seen via the WIG benchmark.

And with it, Polish bonds has been sold off (along with the world)

Actions by Polish policymakers may aggravate the dour sentiment on emerging markets.

As Reuter’s analyst Sujata Rao at Global Investing observed: (bold mine)

If the backdrop for global emerging markets (GEM) were not already challenging enough, there are, these days, some authorities that step in and try to make things even worse, writes Societe Generale strategist Benoit Anne. He speaks of course of Poland, where the government this week announced plans to transfer 121 billion zlotys ($36.99 billion) in bonds held by private pension funds to the state and subsequently cancel them. The move, aimed at cutting public debt by 8 percentage points,  led to a 5 percent crash yesterday on the Warsaw stock exchange, while 10-year bond yields have spiralled almost 50 basis points since the start of the week. So Poland, which had escaped the worst of the emerging markets sell-off so far, has now joined in.

But worse is probably to come. Liquidity on Polish stock and bond markets will certainly take a hit —the reform removes a fifth of  the outstanding government debt. That drop will decrease the weights of Polish bonds in popular global indices, in turn reducing demand for the debt from foreign investors benchmarked to those indices. Citi’s World Government Bond Index, for instance, has around $2 trillion benchmarked to it and contains only five emerging economies. That includes Poland whose weight of 0.55 percent assumes roughly $11 billion is invested it in by funds hugging the benchmark.

As the US dollar liquidity is being drained off the world, governments will become increasingly exposed on their dependence on debt, and subsequently on their debt based economies.

Such dynamic are presently being ventilated mainly via the currency markets where many emerging markets including the ASEAN region have been facing a currency storm.

Nonetheless, pension funds have increasingly become targets for government’s financial repression as in the case of Argentina and Spain.

Pension funds have also transformed into tools for market interventions in order to support political objectives such as in the Philippines.

And the seeming political trend in response to the US dollar scarcity has been knee jerk reactions to indulge in more direct and harsher financial repression or savings confiscation measures. 

Hardly a positive sign.