Bankrupt system
Panic gripped the world financial markets last week as the US economy took a serious beating. The simultaneous bankruptcy of the US' fourth largest investment bank, Lehman Brothers Holdings, and near collapse of financial giant Merrill Lynch was a nightmare come true for international investors.
Bank of America's (BoA) $50-billion takeover of Merrill Lynch didn't calm fears, either. The move will make BoA the world's largest financial institution, but the wobbly finances of Merrill Lynch and Countrywide, which it acquired last year, led one CNN commentator to speculate that the bank's strategy was "to become too big to fail."
To make matters worse, investors held their collective breath as American insurance giant American International Group (AIG) teetered on the verge of collapse. Even the US Federal Reserve's intervention and $85-billion bailout package failed to calm fears on financial markets.
The International Monetary Fund expects at least $1 trillion in global losses as a direct result of these and other events, such as US government intervention in mortgage giants Fannie May and Freddie Mac. In an interview with American broadcaster ABC's George Stephanopoulos, former Federal Reserve Chairman Alan Greenspan said that this was "by far" the worst economic crisis he'd seen and that more government bailouts were likely.
"Let's recognize that this is a once-in-a-half-century, probably once-in-a-century type of event," Greenspan said.
International losses
The downfall of three of the financial world's true giants - with almost 350 years of experience between them - was simply too much for world financial markets. Shock waves travelling from the American epicenter sent Asian and European markets tumbling.
In Britain, Lloyds TSB agreed to take over HBOS for £12 billion, hopefully avoiding a repeat of February's nationalization of Northern Rock. Russia, for its part, announced a plan to spend $120 billion in state funds to rescue Russia's financial system. The move stood in sharp contrast to PM Vladimir Putin's claims earlier this month that Russia remained a "quiet harbor" for investors.
The roller-coaster ride is far from over. More losses are expected in the US and global aftershocks are likely to follow.
"I think you're seeing parts of that [1929 crash], you're seeing parts of the 1970s, with rising commodity prices and inflationary pressures that may lead to a global economic slowdown," Thomas Laursen, the World Bank's country manager for Poland and the Baltic states, told WBJ.
Investors in Warsaw reacted much the same as their peers in other countries. The WSE's overall WIG and blue-chip WIG20 indices lost 3.62 percent and 3.81 percent, respectively, on Tuesday alone, but ended the week just 1.9 percent and 0.9 percent down on the week after a Friday rally.
Experts were cautious, however, in assessing the long-term impact of these events on the Polish financial system.
"I don't think we've seen anything like it and therefore it's difficult to predict. Have we seen the worst now or is there more to come? I do think that the fundamental causes are behind us, but we may not have seen the full repercussions," the World Bank's Laursen said.
Polish Deputy Minister of Finance Katarzyna Zajdel-Kurowska said that the situation in the US market would not have a significant impact on the domestic financial market. "The fluctuation of financial instrument prices results from indirect effects as well as psychological factors, so it should be short term," she told the press, adding that the fundamentals of the Polish economy were very strong and the situation of domestic institutions stable.
Stock market losses might be symptomatic of the international crisis, but how the situation develops will depend on measures taken by the financial regulators in their attempts to stop a domino effect, said Roland Paszkiewicz, chief analyst at brokerage CDM Pekao.
Long-term slowdown
The Warsaw Stock Exchange has been following in US markets' footsteps for months now. The overall WIG index has dropped by over 45 percent since its July 9, 2007 record. Since the beginning of the year, the value of the shares listed on the WSE has plunged by zł.244 billion.
Around 16.5 million Poles have money in investment and pension funds, which have fallen in value by zł.50 billion since July of last year. Over the first two days of last week alone these funds saw zł.7.7 billion in losses - approximately zł.460 per client, Rzeczpospolita daily reported.
According to Michał Macierzyński, an analyst from Bankier.pl, Poland is facing a long-term economic slowdown.
"The WIBOR (Warsaw Interbank Offered Rate) has been on the rise," he said, adding that Polish banks would tighten their lending rules.
More limited access to mortgages will discourage many potential home buyers, which will lead to a further slowdown and price decrease in the residential market, Macierzyński said.
"There used to be a saying, 'buy today because tomorrow will be more expensive.' Now people will say, 'buy tomorrow, because it will be cheaper than today,'" he said.
In turn, investment loans will become more expensive, which will reduce the volume of investment by domestic companies.
"So they will borrow less, they will invest less and there will be less production, and the demand for labor will decrease," Macierzyński said, adding that these processes would have an impact on the slowdown on the bourse.
A paucity of investors
Dropping stock prices often stimulate a round of acquisitions, but this might not be the case this time in Warsaw because the number of the investors is also falling.
"The situation on the bourse is very bad and nobody will be entering it until everything calms down," Macierzyński said.
Another worry is that the likelihood of the government adhering to its schedule for the privatization of state-owned firms has decreased as a result of the crisis.
"If the crisis turns out to be so serious that it affects the valuation of state-owned companies to be privatized, we will consider modifying the schedule of their bourse debuts," Treasury Minister Aleksander Grad told Rzeczpospolita.
According to Kristel Kivinurm-Priisalm, a managing partner and fund manager at asset-management firm Avaron, the situation on the WSE will be strongly affected by oil prices and the situation in Georgia.
"If oil prices drop, then inflationary pressure will decrease and central banks [around the world] are likely to reduce their interest rates," she said.
Sheltered from the storm
According to Macierzyński, financial institutions worldwide are scrambling to raise funds, and those that do not succeed will go bankrupt.
"Today [Lehman Brothers] has gone bankrupt and we can expect other large institutions will follow," he said.
The need to raise funds is highest among those banks that do not have large international shareholders, according to Kivinurm-Priisalm.
But the Polish banking sector is not under siege, according to Krzysztof Pietraszkiewicz, the president of the Polish Bank Association (ZBP).
"They have not been investing in very risky businesses," he told WBJ. Although many banks are owned by large international investors, they operate under Polish law as Polish entities and are resistant to sudden changes in their large shareholders, Pietraszkiewicz added.
"The Polish economy is not an island, but it is well insulated," said Piotr Bujak, senior economist at bank BZ WBK. He agreed that the Polish banking system in Poland was relatively secure.
"Our banking system has not been exposed to the instruments that have caused problems," he said. The Polish economy can expect a slowdown, he said, but its fundamentals are strong.
Bujak also stressed that exports would decrease, but that this trend will have less impact on the Polish economy than on other economies in the region. "Exports have a lower share in our GDP," he said.
Caution and uncertainty
Despite the relatively insulated nature of the Polish market, the global crisis will continue to have an indirect impact on the Polish economy for some time, Pietraszkiewicz stressed.
CDM Pekao's Paszkiewicz added that international institutions which have lent to Lehman Brothers may have problems with recouping their liabilities. As a result, "They may reduce their activities in Poland," he said.
Paszkiewicz pointed out that growing reluctance for risk-taking may hit the currencies in developing markets such as Poland.
"The Swiss franc may get stronger against złoty. Given the fact that 90 percent of mortgage loans are denominated in Swiss francs, those planning to get a loan will have a hard time," Paszkiewicz said.
The World Bank's Laursen agreed that the attitude towards risk-taking would become more cautious.
"This will also exacerbate the downturn in the global economy, because financial institutions will be much more careful in their credit and asset management decisions. So it becomes bit of a self-reinforcing circle," he said.
"But again I really don't know how deep this is going to go or how long this is going to take. Most international forecasters believe that things will bottom out at sometime around the middle of next year. But there is a lot of uncertainty," he concluded.
