How macro might miss massive micro problems

In Poland, the question is usually phrased: when will Polish public debt exceed 55% of GDP? That 55% mark is a threshold written into public finance law mandating a rather rough austerity program. The law is a safety barrier for a constitutional threshold at 60% of GDP which, once crossed, requires a much more severe austerity program. It's a big deal.

Now you'd think that is a great question for macro analysts. They should forecast deficits by modeling tax revenues on their economic growth forecasts and subtracting projected spending, then checking the effect on the public debt load. And so they do. As a result, they are offering stern warnings to Polish policy makers and investors. Thankfully, those warnings come without the panic seen in the economic & FX forecasts from late-2008/early-2009 when Poland got lumped in with the region's problems without reference to factors that set Poland aside from the pack. Today you can read from one analyst that Poland is in the best position thanks to the relatively strong economic growth. Another will bemoan the fact that the mild Polish slowdown will prevent the country from enacting any real reforms while neighbors, more threatened today, will be emboldened to take unpopular fiscal reform that will pay off down the road. By the numbers, most have Poland breaking the 55% mark at end-2010.

But macro analyst are actually somewhat misplaced here. With the threat of legally mandated austerity programs looming, the question rather belongs to political analysts and, unfortunately, accounting analysts. With Poland financing its rising deficits almost exclusively with privatization, toss in equity analysts as well.

The question, properly phrased to political analysts, becomes "When will Polish politicians ALLOW public debt to exceed 55% of GDP and ALLOW the nation to go under the rigor of a mandated austerity program?" Poland has presidential elections in 2010 and Parliamentary elections in 2011. The answer might be 'never.'

The component questions include: will Poland intervene on currency markets at year-end to drive down the book value of its foreign currency debt? How can Poland shuffle funds off the balance sheets, so to speak, to show a lower deficit or debt burden than might be the case (the pension fund de-reform may be the first example)? The list of such questions is long. Bring in the budget accountants and conspiracy theorists.

Yet I suspect that the most interesting questions belong to equity analysts. Poland has said that to avoid issuing new debt, it will fund PLN37 bln of its deficits in 2009 and 2010 via privatization receipts. That will be a record in state asset sell-off to stand for the ages, if it is hit. The real analytical problem is determining if the assets on the block can take PLN 37 bln at auction.

Thus far, Poland is behind schedule, having failed to sell off an additional stake of energy group Enea. Call that the answer to my post The path of least resistance. Something about how Poland was treating the bidders suggested Poland was less than serious about selling the stake.

If you, like me, would prefer the next real-life experience to analytical models, you need only wait to mid-December.

Poland is selling its chemical sector and has only recently extended the bidding deadline to mid-December, particularly for chemical group Ciech. Ciech is a tough sale. Check out the sad song of Q3 earnings here http://tr.im/G8aD. Ciech has domestic problems, both in operations and on the balance sheet. Then there is the purchase of Soda and Goworra (Germany's SodaWerk and Romania's Goworra and yea, it more than just rhymes with the biblical names of ill-repute), the foreign units Ciech bought back when having foreign units was the rage that Ciech was afraid of missing out on. Poland had to reiterate a number of times after Q3 earnings season that it still plans on selling its chemical sector. The question remains open if it can sell the chemical sector for money, and not just vows to keep it afloat.

It’s the macro question that avoided macro analysis.