Author: Tomasz Blusiewicz Harvard University

Advantages of Financial Backwardness:

Poland’s ‘Primitive’ Banking Sector and the Country’s Safe Passage Through the Global Financial Crisis

Prepared for Presentation: NORTHEAST SLAVIC, EAST EUROPEAN, AND EURASIAN STUDIES CONFERENCE

NEW YORK UNIVERSITY, MARCH 21, 2015

Abstract: Poland was the only EU country to avoid recession in 2009 – its GDP grew by 1.9 percent while the EU-27 averaged a decline of 4.3 percent and no other country recorded growth. Several explanations accounting for the singularity of the Polish case are in circulation. Some emphasize the possibility of a large fiscal expansion (budget deficit of up to 7.8 percent in 2008) that could be afforded thanks to the prior modest level of public debt (45 percent in 2007). Others point Poland’s large domestic consumption that helped to cushion the foreign shocks. The Polish Zloty (PLN) experienced the strongest depreciation of all CEE currencies in Q4 of 2008 and Q1 of 2009, strengthening the export sector. The Polish central bank (NBP) enjoyed the freedom to pursue active monetary policy and moved quickly to supply liquidity. While all those factors certainly did play a role, there is one sector of the Polish economy that is truly unique in the region - the banking sector (PBS). As expressed by Marek Belka, the President of the NBP, during a lecture at Harvard in September 2011: there is “no point in denying [that the PBS is] primitive”. This ‘primitiveness’ is well-visible in such indicators as the very low level of trade in securitized financial instruments, low indebtedness per household or low share of loans denominated in foreign currency. There was no single bank default or bailout in Poland during the crisis. My research shows that the PBS was indeed the least ‘advanced’ among the new EU-12 members, which turned out to be an advantage since the relatively weak interconnectedness with global finance rendered the sector less vulnerable to the shocks of the crisis. I examine the characteristic features of the PBS in a comparative way in light of the transmission channels of the global financial crisis that did not, or did to a lesser degree, work in Poland in contrast to other CEECs. I argue that the distinctive nature of the PBS has to be taken into consideration while explaining the relatively undisturbed passage of the Polish economy through the crisis.

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I. The Polish ‘Green Island’

Poland was the only member of the European Union to avoid recession in 2009 when its GDP growth

equaled 1.9 percent while the EU-27 averaged a negative growth of 4.3 percent and no other country

reported positive growth. Poland was also the leader in its region – other Central and Eastern European

countries (further in the paper: CEECs) were in deep recession with a 7.1 percent average annual GDP

decline. The second country to be least affected by the crisis was the wealthiest country of the region, the

Czech Republic, with a 4.1 percent decline. The Baltic countries, often painted as model pioneers of the

transition in mid-2000s, saw a dramatic decline which surpassed 20 percent GDP decline on a quarterly

basis1. Poland’s singularity has received considerable global attention and numerous explanations

appeared to explain it. Some experts pointed to the role played by the possibility of high fiscal expansion

and stimulus packages. Poland’s budget deficit grew to 7.3 percent in 2008 and 7.8. percent in 2009 2

which could be afforded thanks to the hitherto low levels of public debt (45 percent in 2007 and 51

percent in 2009)3. Others pointed to the fact that Poland has the largest domestic market in the region

and that high domestic consumption helped to cushion the negative foreign shocks. Next, the Polish Zloty

(PLN) experienced the strongest depreciation among all CEECs currencies in Q4 of 2008 and in Q1 of

20094. It helped the already booming export sector to pull the economy in its wake. Exchange with

Germany was the mainspring of the growing Polish export capacity in particular. The Polish central bank

(NBP) enjoyed the freedom to pursue an active monetary policy, unlike the Baltic countries or Slovakia

which were then already tied to the ECB. The NBP reacted quickly to supply the market with the necessary

liquidity while inflation stayed low due to the falling energy prices.

1 Narodowy Bank Polski, Analiza sytuacji gospodarczej w krajach Europy Środkowej i Wschodniej, NBP: Warsaw, June 2010, pages 5-6. 2 Eurostat, http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tsieb080&plugin=13 Tomasz Szkica and Robert Pater. Ocena Wplywu Kryzysu Finansowego na Stan Finansow Publicznych w Polsce, e-Finanse, vol. 6, nr 4. 2010, page 40.4 Narodowy Bank Polski, Polska Wobec Swiatowego Kryzysu, NPB: Warsaw, September 2009, page 16.

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While all of those factors certainly mattered, all four of them can be presented with counter-

arguments that question their explanatory power by showing that none of them was specific to Poland. To

give a few examples:

1) Numerous other countries had higher budget deficits (30 percent in Ireland in 2010, almost 10

percent in Latvia and Lithuania in 2009)5, lower public debt and a sounder record of fiscal discipline

2) Ukraine and Russia have larger domestic markets. Furthermore, aggregate domestic demand fell in

Poland by 1.1 in 2009 in comparison to 20086

3) The flight from local currencies has been perceived by some authors as the main cause behind the

banking crisis in the CEECs7. In Poland similar concerns were voiced due the high number of mortgage

loans denominated in the Swiss Frank

4) Central banks in other countries reacted similarly; in fact the NBP’s actions were a part of a larger

international initiative – the Vienna Initiative.

The one aspect of the Polish economy that truly stands out in comparative international analysis is the

banking sector. The evidence presented in this paper makes it possible to argue that the Polish Banking

Sector (further in the paper: PBS) was among the least ‘advanced’8 among the new EU-12 members9 and

that this fact turned out to be an advantage as the PBS’s relatively weak interconnectedness with global

finance rendered the sector less vulnerable to the external shocks following the collapse of the Lehman

Brothers. As it was expressed by the President of the Polish central bank, Marek Belka, in a speech at the

Center for European Studies at Harvard University in September 2011, the PBS sector is aptly

5 Eurostat, http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tsieb080&plugin=16 Narodowy Bank Polski, Analiza sytuacji gospodarczej, page 347 See: Section II.8 For what is meant by the term ‘advanced’, please see: Section III. 9 Estonia, Latvia, Lithuania, Poland, Czech Republic, Slovakia, Hungary, Slovenia, Romania, Bulgaria. For self-evident reasons, I exclude Malta and Cyprus.

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characterized by the word “primitive”10. This primitiveness is manifest through many indicators such as the

very low level of trade in securitized financial instruments, low indebtedness per household or the low

share of loans denominated in foreign currencies. The fact that there was no single bank default or bailout

in Poland during the crisis in also unique in the EU context. In this paper, I examine the characteristics of

the PBS and compare them internationally. I suggest several channels of transmission of the global

financial crisis that did not, or did to a lesser degree, occur in Poland in contrast to other countries of the

region.

II. Global Trends, Crisis and the Vienna Initiative

Financial integration with world markets in Central and Eastern Europe in the 2000s proceeded

rapidly. Slovenia was the only country where foreign capital owned less than 50 percent of the banks by

2006. In the Baltic countries this ratio reached 90 percent11. This process brought quick and tangible

benefits. The easier and cheaper access to private consumer and mortgage loans was perhaps the most

visible and popularly recognized. Especially after 2002, when interest rates both in Europe and America

remained on historically low levels for several years, an unprecedented wave of credit expansion followed

in Central and Eastern Europe with a peak in 2007. It was accompanied by a removal of capital flow

restrictions in the forex markets which made it possible to offer loans to local customers denominated in

the Euro or the Swiss Franc. Mortgage loans denominated in the Franc, for example, were offered at a

significantly lower interest rates than those in the local currencies. This differential drove the share of

foreign currency loans to unprecedented highs: 80 percent in Estonia and Latvia and 60 percent in

Bulgaria, Hungary, Lithuania and Romania while it did not exceed 25 percent in Poland12. In addition, the

loan-to-deposit ratio began to look unstable, especially in Latvia where it reached a ratio of 3 to 1 in

10 Marek Belka, The 2011-12 August Zaleski Lecture: “European Dimensions of the Global Financial Crisis”, Harvard University, 09.26.2011.

11 Tigran Poghosyan and Arsen Poghosyan, Foreign bank entry, bank efficiency and market power in Central and Eastern EuropeanCountries. Economics of Transition, Volume 18 (3) 2010, page 573.12 Malgorzata Iwanicz-Drozdowska, Integracja Rynkow Finansowych w Unii Europejskiej, Warsaw: Narodowy Bank Polski, 2009, pages 10 -13.

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200913. In consequence, the Eastern European local daughter banks became critically dependent on

Western mother banks for financial support and were unable to attract sufficient funds from the local

markets to continue the expansionary policy in a self-sufficient manner. In Poland the situation was

different because the total volume of loans became higher than the total volume of deposits only after

July 2009.

The expansion in the CEE markets was conducted only by some Western banks. It included primarily

fifteen Western European banks from seven countries – Austria, Belgium, France, Germany, Greece, Italy

and Sweden14. Citigroup was the only US institution that entered the CEE market on a larger scale. Capital

from Austria, Belgium, Italy and Sweden in particular became heavily involved. In Austria, with the

Raiffeisen bank playing the leading role, the local banks had lent to Eastern Europe an equivalent of 70

percent of the Austrian GDP15. The ratio for Sweden and Belgium reached 20 percent16. According to

Pisani-Ferry and Sapir (2009), the financial sector bailouts in France and Germany accounted for less than

2 percent of each country’s GDP, 3 percent in the UK, 4 percent in Ireland and Belgium and 6 percent for

the Netherlands and Luxemburg. “Austria, a small country whose banks are heavily exposed in Central and

Eastern Europe, has already committed some 5 percent of GDP.”17 Overall, CEECs had borrowed a total of

around 1.7 trillion USD abroad between 2002 and 2009; in 2009 the aggregate volume that either CEECs

banks or their customers had to repay or rollover reached 400 billion USD or one-third of the region’s

GDP18.

The problem had its global and local dimensions. Western European banks and their CEE subsidiaries

were deep into trade in securitized and parceled ‘subprime’ loan derivatives as was everyone else to a

greater or lesser extent. Locally, following the growth of risk-averse market sentiment in Q4 of 2008,

13 Ibidem, page 7.14 Aslund, Anders. The Last Shall be the First : The East European Financial Crisis, 2008-10. Washington, DC: Peterson Institute for International Economics, 2010, page 70.15 Ibidem, page 70.16 Ibidem, page 71.17 Pisani-Ferry, Jean and Adam Simon Posen. The Euro at Ten : The Next Global Currency? Washington, DC: Peterson Institute for International Economics, 2009, page 79.18 Aslund, The Last Shall be the First, 70.

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investors rapidly withdrew capital from the emerging markets (see: Chart 1.). In consequence, the free

floating CEE currencies were hard hit. For example, the Polish Zloty had depreciated by almost 90 percent

between July 2008 and February 200919. This development led to growing anxiety concerning the CEE

customers who took loans in foreign currencies since a vast majority of them did not purchase insurance

against currency rate fluctuations.

Many experts feared that the number of defaults would be very high leading to a bank failure

mechanism similar to the subprime housing mortgage spiral in the US. In the early months of 2009 the

Western press was flooded with articles prophesizing the coming of financial doomsday:

“The long ticking bomb of Eastern European debt is starting to explode with an even greater inevitability as that of subprime mortgages exploding in the United States […].

[Is] Latvia the Next Iceland?

The situation has reached such a crisis point in Latvia that anyone that reports on the truth is being arrested by the Latvian security forces as an on omen that economic turmoil means a return toward tyranny […]; the Latvian secret police arrested Dmitrijs Smirnovs, a university professor for delivering gloomy forecasts on the prospects for the Latvian economy and the state of the Latvian banking system.”20

From a different article:

“The dimension of the Eastern European emerging loan crisis pales anything yet realized. It will force a radical new look at the entire question of bank nationalizations in coming weeks regardless what nice hopes politicians in any party entertain. According to my well informed City of London sources, the new concerns over bank exposures to Eastern Europe will define the next wave of the global financial crisis, one they believe could be even more devastating that the US subprime securitization collapse [...]. Austria’s largest bank, Bank Austria [...] faces what the Vienna press calls a ‘monetary Stalingrad’ over its loan exposure in the east. [...] According to estimates published in the Vienna financial press, were only 10 percent of the Austrian loans in the east to default in coming months, it ‘would lead to the collapse of the Austrian financial system.’ The EU’s European Bank for Reconstruction and Development (EBRD) in London estimates that bad debts in the east will exceed 10 percent and ‘may reach 20 percent’.”21

19 http://www.money.pl/pieniadze/forex/waluty/forex,usdpln.html20 Ibidem.21 F. William Engdahl, Next Wave of Banking Crisis to come from Eastern Europe, Global Research, 02.18.2009.

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Chart 1. Net capital and bank cross-border flows, 2006-200922

In the end it turned out that such voices were exaggerated, but they did sound realistic during the

nadir of the crisis in February and March of 2009. A month earlier, in January, the problem had been

noticed by the European Bank for Reconstruction and Development and the IMF, which invited the

representatives of the World Bank, the European Commission, the European Investment Bank, central

bankers, governments and supervisory bodies to Vienna to discuss how to address it. In the words of an

EBRD official: “in the spirit of this cooperation the Joint Action Plan of EBRD, EIB and World Bank Group

was launched in February with the aim of providing 25 billion EUR to banks in the region and for lending to

the real economy in 2009-2010”23. Besides this large reserve liquidity pool, a 250 million EUR facility was

22 Blanchard, Olivier et. al., "The Initial Impact of the Crisis on Emerging Market Countries." Brookings Papers on Economic Activity (Spring, 2010), page 279.

23 Thomas Mirow, The role of the EBRD in overcoming the financial crisis in Central and Eastern Europe, speech at the Joint Vienna Institute,

Vienna, 07.24.2009

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created to provide on-going liquidity for bank customers who have been negatively affected by adverse

market conditions. Other stability-aimed actions that are worth mentioning included:

A 432 million EUR loan to the subsidiaries of the Italian Unicredit across eight CEECs to

support the financing of small and medium sized enterprises, lease finance and energy

efficiency projects in the region

Significant equity investment in Latvia’s Parex Banka (nationalized in November 2008) to

help restructure the bank’s corporate governance and readjust its business structure

A 200 million EUR loan to MOL, Hungary’s leading energy company, to finance the

completion of a strategic gas storage facility in the southern part of the country24

Apart from providing liquidity, it was critical to offer a legal guarantee ensuring that the bailed out

western banks would not be compelled to abandon their CEE subsidiaries. In March 2009, the European

Council summit concluded that domestic bank support packages would not be restricted to operations in

their respective home markets25. The Vienna initiative also encouraged CEECs to apply for the IMF standby

program and the Flexible Credit Line, which Poland did in May 2009. Finally, the EBRD and the IMF held

separate meetings with the major Western European banks and tried to persuade them to refinance and

recapitalize the banking system in the countries where their subsidiaries were operating, which was

largely met with a positive response.26

Thanks to the coordinated international effort in which multiple institutions participated in a

determined way, a breakdown of the banking system in CEE was avoided. It came at a cost however, the

most important being the sudden halt to the expansionary credit policy and cutting the local enterprises

off from the cheap source of finance that they had been relying before the crisis. This contraction also did

take place in Poland, but it was by far the least pronounced in the region – the amount of credit on the

market almost stopped growing for several months, but it did not record a single monthly contraction as it

was the case everywhere else in CEE. In the Baltics, the annual growth rate of aggregate credit volume fell

24 Ibidem.25 Narodowy Bank Polski, Annual Report 2009, NPB: Warsaw, 2010, page 72.26 Ibidem, page 73.

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from 60 percent in 2006 to negative single digits in 2009. A decline reaching 10 percent was recorded in

Romania and Bulgaria27. In Poland, this figure was equal to 24 percent in July 2009 (compared to July 2008)

which was three times higher than the regional average. The inflow of capital (net bank transfers and

commercial credits) in Poland fell from 6.5 percent in the first half of 2008 to 1.8 percent of GDP in Q1 of

2009. In Latvia, for example, the net outflow of capital was equal to 21 percent of GDP for the same

period.28 An analysis of the structural characteristics the PBS on the eve of the crisis is critical in explaining

why no net capital outflow had been recorded in Poland.

III. The Polish Banking Sector

The PBS had undergone a process of ownership transformation reflecting the broader regional trends.

Big multinational corporations such as Raiffeisen, Unicredit, ING or Citigroup entered the market in the

late 1990s and helped to privatize the state owned banks. The share of foreign bank capital in Poland

reached approximately 70 percent in 2007 – a figure close to the regional average29. The domination of the

foreign capital posed precisely the kinds of problems addressed by the Vienna Initiative. However, there

was a marked difference in the degree to which the process of financial integration and the so-called

‘financial deepening’ took hold in Poland compared to other countries of the region.

First of all, the ratio of bank-held assets to GDP was the second lowest in the EU-27:

27 Narodowy Bank Polski, Polska Wobec Swiatowego Kryzysu, pages 15-16.28 Ibidem, pages 15-20.29 Ibidem, page 25.

9

RomPol Lit SvkHun Bul Cze Slo Est Lat Fin Gre Ita SwePor Spa Ger Aus Fra Hol Bel Den UK Cyp Mal Ire Lux50

550

1050

1550

2050

2550

59 77 85 92 107108110130133155160167217255270281312329353392392430500588

700715

2,533

Chart 2. Banking Sector Assets as a share of GDP, percent values.30

The chart above reflects the patterns of financial deepening in Europe. The relatively high figures for

Estonia (133 percent) and Latvia (155 percent) merit special attention. In general, one can argue that the

lower the ratio the lower the impact that a financial crisis can potentially deliver upon the ‘real’ economy.

Next, the share of loans extended in foreign currencies as of 2007 is depicted in the chart below:

30 Source: Malgorzata Iwanicz-Drozdowska, Integracja Rynkow Finansowych, page 11

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Chart 3. Share of Foreign Currency Loans in 2007, percent values31

With the low ratios in Poland, Czech Republic and Slovakia, it is unsurprising why some observers

predicted a ‘monetary Stalingrad’ to occur in the Baltics or Hungary, but not in Poland. The Baltic countries

are a special case here because all three of them had their currencies in some ways pegged to the Euro; it

is thus Hungary that emerges as the most vulnerable case, in particular because the Hungarian Forint

depreciated on the scale comparable to the Polish Zloty.

The table below is equally indicative. It depicts the total amount of outstanding commercial loans

as a share of GDP in 2008. Two issues are especially striking. First, the Polish ratio was the lowest in the

EU, lower than in Romania and significantly lower than in Hungary and the Baltics. The second is the

particularly high levels in Ireland, Spain, Portugal and the relatively low level in Germany. This observation

provides a hint about how the rapid economic growth in those countries (especially in Ireland and Spain)

in mid-2000s had been financed and where the source of the credit and housing bubble in 2007/2008

originated. The low level of credit-financing of enterprises in Poland suggests that the high GDP growth

31 Source: Anders Aslund, The East European Financial Crisis, page 13

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before the crisis (6.2 percent in 2006, 6.8 percent in 2007) was less dependent on the availability of credit

than elsewhere. It also implies that any negative shock in the financial sector should have had a less

pronounced impact on GDP growth.

Bel BulCze Den Ger Est Ire Gre Sp

a Fra Ita Cyp Lat Lit LuxHun

Mal HolAus Pol

PorRom Slo Svk Fin Sw

e UK0

20

40

60

80

100

120

140

160

Chart 4. Commercial loans as a share of GDP, percent values.32

The analysis of the liability structure of the CEECs banking sector balance sheets as of March 2009

conducted by the World Bank (2009) revealed several characteristics of the PBS through which it could be

considered as less innovative than other banking sectors in the region. In Poland, the share of equity in the

liability structure was the lowest among CEECs (apart from Romania) and was in the single digits, while in

other CEECs it was above 10 percent. The emulation of the US model of credit expansion in the housing

and construction industry was also less pronounced in Poland. The Polish ratio of mortgages as a share of

household lending was around 50 percent in 2008 compared to 80 percent in Estonia and Latvia and 70

32 Source: Anders Aslund, The East European Financial Crisis, page 15.

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percent in Czech Republic. The aggregate household indebtedness ratio in Poland was significantly lower

than the region’s average, respectively 48 and 76 percent of GDP. The share of parent bank debt funding

was the lowest and negligible in Poland while in Lithuania and Estonia it reached 50 percent, and 25

percent in Hungary33. This means that the Polish daughter banks did not require external funding from the

mother companies, at least not during the initial stage of the crisis. Next, the ratio of liquid assets to total

assets in March 2009 was also the lowest in Poland (next to Ukraine) and was below 5 percent – an

indication that conservative and long-term investment strategies were preferred. An analysis of the

sectoral composition of loans in March 2009 reveals that Poland had the lowest proportion of loans

extended to the corporate sector and the highest going to households of all surveyed countries. Finally, in

2007 Poland had the second lowest share of Euro-denominated deposits among CEECs, by a fraction of

percent higher than in Ukraine34. All these as well as other facts were summarized by the World Bank

researchers in the following table:

Bank funding / Credit growth

Wholesale Gray Area Parent bank Resident Deposits

X

Convergent* X Hungary CroatiaSerbia

Czech and Slovak

Republics, Poland

Lower risk

X Kazakhstan Bulgaria Macedonia, FYR Gray AreaExcessive** Russia Ukraine

LatviaLithuania,

EstoniaRomania Higher Risk

X Low Stability Gray Area Medium Stability

High Stability X

Table 1. Credit market characteristics in financially integrated countries35

* Countries experiencing credit growth rates that could be viewed as in line with those countries with similar initial rations of private sector credit to GDP.** Countries experiencing credit growth rates that could be considered as above average; that is, their credit growth rates are higher relative to their initial rations of credit to GDP

33 Mitra, Pradeep, Marcelo Selowsky, and Juan Zalduendo, Turmoil at Twenty, pages 48-109.34 Pisani-Ferry, Jean and Adam Simon Posen, The Euro at Ten, page 131.35 Source: Mitra, Pradeep, Marcelo Selowsky, and Juan Zalduendo, Turmoil at Twenty, page 10.

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Poland fell into the most stable category both because credit expansion was not excessive and because it

was paralleled by growth in the volume of resident deposits. In Hungary, for example, credit expansion

was also not considered excessive, but it was not accompanied by sufficient growth in deposits while

Estonia and Lithuania relied on parent bank funding to sponsor the expansionary credit policy.

The data presented above is stylized and general in nature and requires more detail to facilitate an

analysis of the internal workings of the crisis transmission mechanisms into the PBS. However, it is

possible to conclude that it differed significantly from the more innovative and expansionary policies

conducted in other CEE countries, especially in the Baltics and Hungary. As it was put by Witold Koziński, a

senior official from the NBP: the PBS was involved in a rather “traditional banking activity model. Local

banks were not invested in […] the complex structured financial instruments [and therefore] the size of

their exposure to the US subprime market risks, either in the form of holding structured financial

instruments or other instruments issued by the largest investment banks, was negligible.” 36 It is a matter

for further debate whether this phenomenon is more aptly captured by terms such ‘backwardness’,

‘conservatism’, ‘sound financial principles’ or other, but the point remains that it rendered Poland, more

than any other country in the region, less vulnerable to the financial crisis of 2008/2009.

Nonetheless, the relatively less advanced characteristics of the PBS and of the Polish economy in

general do not take credit away from the sound borrowing practices of Polish consumers and firms as well

as from the policies of private banks, the central bank or the government. The PBS had been steadily

accumulating high profits on the eve of the crisis (See: Table 3. and Table 4.). Even in 2008, Polish banks

reported high earnings that supplied a buffer helping to amortize the negative external shocks. The quality

of mortgage loans remained safe – only 1.4 percent of such loans were evaluated as ‘dysfunctional’ in

September 200937.The overall satisfactory PBS performance might in turn serve to explain the relative lack

of incentives to engage in operations carrying higher risk premiums.

36 Witold Kozinski, The international banking crisis and domestic financial intermediation: the experience of Poland, BIS Papers No. 54, 2009, page 343.37 Ibidem, page 343.

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Table 2. Profitability and capital adequacy of the Polish banking sector, 2006-200938.

Furthermore, the interbank market in Poland did not cease to operate in Q1 of 2008, like it did in

most other countries in Europe, even while reporting a total decrease of operations reaching 10.3 billion

PLN between August 2008 and December 2008.39 Due credit has to be given to the NBP for the timely

supply of reserve liquidity. As it was expressed by one of the leading experts on the CEECs postcommunist

economic transition, Anders Aslund: “the NBP leaned against the wind, when it perceived that asset

prices, notably housing prices, were rising too steeply. […] With its stellar monetary policy for many years,

Poland could get away with a comparatively large budget deficit40. In addition, in contrast to other CEECs,

38 Source: Witold Kozinski, The international banking crisis, page 346.39 Ibidem, page 344.40 Anders Aslund, The East European Financial Crisis. CASE Network Studies & Analyses No.395, 2009, page 19.

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the NBP limited the volume of mortgages in foreign currency by a set of regulations before the crisis41. In

early 2009, the NBP increased the volume of REPO operations (they could be renewed with the same

collateral) and introduced foreign exchange swap operations. The minimum required reserve rate was

reduced and the NBP allowed investors to redeem their NBP bonds before they matured. In terms of

providing liquidity – the category of assets accepted as collaterals for loans was broadened and the short

term/long-term refinance operations price differential was decreased42. Alongside the technical

innovations, the reference interest rate was decreased from 6 percent to 3.5 percent in June 2009, the

lowest level in history. Poland has also applied and has been accepted to the Flexible Credit Line program

run by the IMF, which had an immediate effect on the market risk perception allowing the Zloty to recover

almost half of its loses since September 200943. Most of those measures were to a large extent a copy of

what the ECB was doing, but were nonetheless applied timely and with determination. NPB also

occasionally used its Europe’s largest foreign currency reserve (76 billion USD in 2008) to intervene in the

forex market to prevent Zloty’s speculative depreciation. The fact that Poland owns such a sizeable

monetary reserve (15th largest in the world) can be again interpreted either as a mark of prudence or

backwardness. The immediate company of Libya, Mexico, Thailand and Malaysia and Algeria in this

ranking (10-14th places respectively) perhaps supports the latter, but the size of the Polish economy

renders nominal comparison with other CEECs skewed in this context.

IV. Conclusion

This paper’s comparative examination of the PBS is an overview and facilitates only tentative

conclusions. Nonetheless, the primary role of the distinct features of the PBS as an explanatory factor

behind the unique experience of the 2008/2009 crisis in Poland is beyond doubt. It is highly likely that the

41 Leszek Balcerowicz in: Pisani-Ferry, Jean and Adam Simon Posen, The Euro at Ten, 193.42 Narodowy Bank Polski, Annual Report 2009, pages 52-53.43 Narodowy Bank Polski, Polska Wobec Swiatowego Kryzysu, page 40.

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causal relationship between the PBS and the overall performance of the Polish economy was primarily

negative and only partially positive. In other words, it was the lack of (or weak) presence of certain global

trends in financial markets that constituted the underlying reason for the particular structural

characteristics of the PBS on the eve of the crisis. The sound financial standing of the Polish banks in as

well as the actions undertaken by the NBP and other authorities at home and abroad had a mitigating, but

not decisive, effect.

A more positive interpretation suggests that the PBS presents a rare case of conservative financial

prudence in the midst of unorthodox and eventually destabilizing practices imported from North America.

The pace of Poland’s postcommunist ‘shock therapy’ and the general openness of the country to Western

capital and ideas render such an interpretation questionable. A more negative interpretation is that the

less innovative structure of the PBS was a reflection of certain intrinsic features of the Polish economy as a

whole and in particular the low level of commercial credit and the traditional strength of small business

relying on internal financing and domestic consumption. A close study of institutional and consumer

behavior is required to fill the macro perspective sketched in this paper with empirical evidence to provide

a finer picture explaining how the Polish ‘green island’ weathered the global financial crisis.

17

List of references

Secondary Sources:

1. Aslund, Anders. The Last Shall be the First : The East European Financial Crisis, 2008-10. Washington, DC: Peterson Institute for International Economics, 2010

2. Iwanicz-Drozdowska, Malgorzata. Integracja Rynkow Finansowych w Unii Europejskiej, Warsaw: Narodowy Bank Polski, 2009

3. Mitra, Pradeep, Marcelo Selowsky, and Juan Zalduendo. Turmoil at Twenty : Recession, Recovery, and Reform in Central and Eastern Europe and the Former Soviet Union. Washington, DC: World Bank, 2010

4. Pisani-Ferry, Jean and Adam Simon Posen. The Euro at Ten : The Next Global Currency? Washington, DC: Peterson Institute for International Economics, 2009

Journal Articles:

1. Aslund Anders. “The East European Financial Crisis.” CASE Network Studies & Analyses No.395, 2009

2. Blanchard, Olivier et. al. "The Initial Impact of the Crisis on Emerging Market Countries." Brookings Papers on Economic Activity (Spring, 2010).

3. Kozinski, Witold. “The international banking crisis and domestic financial intermediation: the experience of Poland.” BIS Papers No. 54, 2009

4. Pater, Robert and Tomasz Szkica. “Ocena Wplywu Kryzysu Finansowego na Stan Finansow Publicznych w Polsce.” e-Finanse, vol. 6, nr 4. 2010

5. Poghosyan, Tigran and Arsen Poghosyan, “Foreign bank entry, bank efficiency and market power in Central and Eastern European Countries.” Economics of Transition, Volume 18 (3) 2010

Press articles:

1. Engdahl F. William. Next Wave of Banking Crisis to come from Eastern Europe, Global Research, 02.18.2009

2. Walayat Nadeem. Subprime Eastern Europe to Bankrupt Western European Banks, Market Oracle, 03.04.2009

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Reports of the Narodowy Bank Polski:

1. Narodowy Bank Polski, Analiza sytuacji gospodarczej w krajach Europy Środkowej i Wschodniej, NBP: Warsaw, June 2010

2. Narodowy Bank Polski, Polska Wobec Swiatowego Kryzysu, NPB: Warsaw, September 2009

3. Narodowy Bank Polski, Annual Report 2009, NPB: Warsaw, 2010

Speeches:

1. Belka, Marek. The 2011-12 August Zaleski Lecture: “European Dimensions of the Global Financial Crisis”, speech at Harvard University, 09.26.2011

2. Mirow, Thomas. The role of the EBRD in overcoming the financial crisis in Central and Eastern Europe, speech at the Joint Vienna Institute, Vienna, 07.24.2009

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