A downward Spiral

The second victory in a row for a Kaczyński twin has done nothing to make the political situation in Poland any clearer. The parties that were supposed to form a sober center-right coalition can't seem to stop bickering, which has left the door open for populist parties to make their presence felt. The uncertainty is weighing heavily on financial markets, and now foreign investors are jumping ship.

Coalition negotiations between Poland's two main conservative parties - Law and Justice (PiS) and Civic Platform (PO) - ground to a halt last week over disagreements on the allocations of posts and economic policy, dashing hopes that the end of the presidential race would facilitate greater cooperation between the two biggest parties in the Sejm. The prospects for reaching an agreement took a turn for the worse when PiS' euroskeptic politician Marek Jurek was elected speaker of the Sejm, thanks to support from Self-defense and the League of Polish Families.

Struggle for Speaker

The influential post was supposed to go to PO as part of a power-sharing deal, but a lack of agreement on which PO politician should hold the post resulted in PiS pushing their own candidate through. "I rule out talks with people who want 100-percent power. I do not see any possibility to continue talks," PO leader Donald Tusk said last week. PO also accused PiS of forming an unofficial coalition with populist parties. PO's Adam Szejnfeld told the WBJ: "We are talking with PiS about the diversification of power among the coalition members. Power shouldn't be in one party's hands, PO can't just be an addition to the coalition."

A significant rift between the two parties was visible prior to the election of Jurek as Speaker of the Sejm, as PiS and PO were not able to reach an agreement over the allocation of ministerial posts. PiS wanted to keep the top posts in the Ministry of Justice, Ministry of Internal Affairs and Administration as well as control over the secret services, a scenario PO firmly opposed, claiming that it puts too much power in one party's hands. PO didn't back down even after PiS offered it two of the four economic portfolios, and proposed to divide the Internal Affairs and Administration portfolio into two new ministries giving one to Jan Rokita, whom PO believe should head the Internal Affairs and Administration Ministry.

Economic impasse

The economic policy of the potential government also remained one of the key obstacles between the two parties. PO doesn't want to give up its idea of a flat tax, but instead of a 3x15 percent system it offered 3x16 percent . However, PiS stands firmly behind its two rates of 18 and 32 percent and opposes a unified VAT rate. Privatization also remains a key obstacle.

In addition, PO is worried about the motives behind Kaczyński joining those opposed to giving central bank chairman Leszek Balcerowicz a new mandate when his term runs out next year. "If it means that the central bank should lose its independence, if it means steering the financial markets, if it means controlling the banking system, if it means administrative and political influence on the currency rates, then there will be no consent to this on our side," Szejnfeld explained.

Minority rule

Donald Tusk's loss in the presidential race means that PO has lost the chance to hold some kind of balance of power, which could have in some way controlled the government and made sure that PO's program is, if not implemented, at least taken into account. "The chances of realizing ideas, visions and goals have fallen drastically," Szejnfeld said. He also added: "For sure, it is not possible that PO will enter a government whose program will be drastically different from our vision."

Although Prime Minister-designate Kazimierz Marcinkiewicz looked determined to continue negotiations with PO, PiS leader Jarosław Kaczyński hasn't ruled out the possibility that a minority government would be formed. "If unfortunately [talks collapse] a minority government will be the only solution," he said. 

Constant discord

The possibility of a minority government was met with gloom on financial markets. Following the election of Jarosław Kaczyński's twin brother Lech as Poland's new president, markets remained stable as investors hoped that the ongoing coalition talks between PiS and PO would result in the creation of a stable, reform-oriented government. However, once the political tensions between the two sides became obvious, and following the election of PiS' Marek Jurek to the post of Speaker of the Sejm, investors panicked. 

The Polish złoty fell by more than two percent in relation to the euro in two days, breaking the zł.4 level following the halt in the coalition negotiations last Thursday - the lowest rating in eight weeks. Last Wednesday alone the euro gained six groszy on the złoty. Bond yields jumped by 15 basis points, with five year bonds' yields reaching 5.22 percent on Thursday. The Warsaw Stock Exchange's bluechip WIG20 index slid by two percent and Warsaw-listed stocks fell by three percent. Stocks worth over zł.1 billion changed hands on Wednesday, as news confirmed that Poland might not have a center-right government after all.  

BRE Bank's chief economist Janusz Jankowiak thinks that the złoty could fall to zł.4.20 against the euro. "Then I expect it to stabilize anticipating the new government's first decisions," he said. Jankowiak doesn't think that any agreement between PiS and PO could strengthen the złoty and calm the markets: "The markets have seen that the coalition, which I don't think is possible, would be subject to constant discord between the two parties, which would weaken the chances of carrying out a sensible program."

Ratings worry

The market panic was worsened by statements from rating agency Standard and Poor's analyst Kai Stukenbrock, who called the coalition building crisis a "detoriation" which may have an effect on Poland's rating outlook - something closely monitored by foreign investors.

Jankowiak thinks that the agency's statements were untimely and unfounded. "The consequences of lowering Poland's rating could mean a return to bond yields trading at as much as seven percent. This would be a drastic jump," he said.

PO is seen by foreign investors and experts as a guarantor of fiscal restraint and free-market policies, while the election winners, PiS, are viewed with skepticism. The Kaczyński twins' party is against adopting the euro in the near future, favors state interventionism and opposes deregulation of the welfare market.

Uncertain future

However, as far as the long-term prospects for the Polish economy go, experts say problems with forming the PiS-PO coalition shouldn't affect economic growth.

"A few additional days of uncertainty will not shake economic growth," the chief economist of the World Bank in Poland, Thomas Laursen, said.

He claims that Poland's growth potential is big, but still "what Poland needs is a rise in employment and investments." According to the World Bank, Poland's economy will grow at the rate of 3.6 percent of GDP, while next year the growth could be even faster - at 4.5 percent. However, as Laursen stressed: "Everything depends on the new government's program."