The quest for a better tomorrow

The day when the new police law comes into force coincides with the monthly overview of Poland’s new rulers’ attainments. As a relatively unpopular foreign-language blogger, I consider my place at the list of enemies of the good change is near the bottom, so I feel free to share my thoughts.

On 19 January the Polish prime minister participated in a debate on threats for democracy in Poland. The course of the debate and its repercussions were a debacle of liberals and a huge victory for Mrs Szydło (whose hollow words and declarations made much better impression than worthless utterances of leftist and liberal deputies) and for all EU-sceptical politicians who put in superb stunt as allies of PiS. The timing of the debate coincided with the news of several refugee rapes in Germany being concealed from the public, a water to the mill of those claiming Germany has no right to interfere into functioning of democracy in Poland if in the name of political correctness they covered up crimes committed by jobless rabble…

On Monday the banking tax came into effect. The draft of the retail trade tax is now in the phase of public consultation and nearly everyone involved tears a strip off it. In the shape it is put forward the biggest retailers who were supposed to bear the burden of the tax are likely to be beneficiaries of it. The most dreadful part of the tax which might be a nail to the coffin of small retailers and which might send several people unemployed is the highertax rate for turnover generated on Saturdays, Sundays and on bank holidays. This will also mean end of cheaper petrol over weekends (it is less costly because many company cars can be fuelled up only during the working week), bigger discrepancies between prices working-week and weekend prices (typical practice for repricing food produces in Auchan) and generally lower competition, since some retailers will drop off. Customer beware, you will pay the bill anyway!

By the way, formally each draft law undergoes public consultation under the lawmaking process. Sound commendably, but I wonder when any amendment proposed by the opposition or any other entity participating in the consultation is included into any final legal act.

The PLN 500 child allowance draft law is also being consulted. There was a short discord between the ministry of finance and the government, but Mr Szałamacha was swiftly taken to the task. Funding for the generous giving away is secured for 2016, when the programme will be serviced only over nine months and when one-off proceeds of PLN 9 billion from LTE frequency auction are to flow in, but streams of revenues which will finance the allowance from 2017 onwards have not been defined. Besides, politicians of PiS keep on appealing to the wealthiest Poles not to apply for the allowance, instead of setting an income cap above which parents would not be entitled to the benefit.

Besides, worth mentioning pace of works on the draft bears testimony to the greatest lie of the pre-election campaign. On 20 October 2015, as the TV debate between Mrs Kopacz and Mrs Szydło was drawing to a close, Mrs Szydło showed a blue file with ready drafts of new laws. She also told she would show the documents during a conference right after the debate. Needless to say subsequently Mrs Szydło only waved the file and has never showed any draft law. An excellent PR stunt, I wonder only why everyone, including journalists and politicians from today’s opposition, has fallen for it no one has taken the trouble to check out what the content of the file was?

And just recently PO came up with a counter-proposal of an even more generous pro-family agenda of giving out PLN 500 for every child, regardless of income per person in a household. Jaw drops open. If the biggest, in terms of number of deputies, party in the opposition, keeps on fooling about like this, in a year they will enjoy support below 10% in the polls. In the meantime Nowoczesna.pl is losing its vigour. In the long run Mr Petru and his partisans are unlikely to retain support above 20% and if they miraculously manage to win the election, they will lose power quickly. Affluent and resourceful people who want lean and efficient state, in other words liberal electorate, make up a tiny, though growing, percentage of voters.

After Standard and Poor's downgraded Poland’s rating, Fitch and Moody’s have announced reviews of Poland’s rating within 12 months and warned of possible downgrades for reasons far more substantive than those behind S&P’s move. As two other rating agencies point out, generous government spending calls into question fiscal balance and in the long-run is likely to decrease creditworthiness of Poland.

The government is getting to grips with the ailments of state-owned coal mines. During the campaign PiS promised not to close any mine and not to make redundant any miner. After the reality check strongly unionised miners, in order to help the government meet its promises, will have to accept salary cuts. Good luck!

Finally the Smolensk crash stands a chance to be scrutinised properly! The new team of experts, some of which even have notion about intricacies of aviation, but none of them has experience in investigating civil nor military passenger airplane crashes, is to carry out an unbiased investigation and definitely will not set any hypothesis in advance; exactly like Mr Macierewicz who signed a decree setting up the team and subsequently during the conference on which establishing the team was announced, adjudicated there had been an explosion which blew up the Tu-154 plane some fifteen or eighteen metres above ground level.

Three weeks into public media takeover, apart from a few spectacular lay-offs, the change I witness is less spectacular than many expected. The extent to which TVP is PiS biased is similar to how TVN is anti-PiS biased. Different views are presented and guests with different views are invited, but the bottom line message delicately instructs audience how to shape their opinion. Nevertheless, fortunately TVP has not stooped to the level of TV Republika, lousy propaganda which would drastically decrease popularity of TVP.

Banking tax

In the eve of the day when Polish financial sector is encumbered with a newly levied asset tax, worth looking at whys and wherefores of the new source of revenues for the government budget.

The concept of additionally taxing financial institutions is a relatively new concept which traces back to 2009, months after several banks in developed countries had been saved by governments from going under. The general rationale for putting extra taxation on the financial sector was:

- precluding banks from getting involved in speculative transactions and

- partly compensating taxpayers whose money had been used for bank bail-outs.

The primary premise is hence not to raise more money to the government budget, but to influence behaviour of the nasty institutions. To pursue such goals, banks taxes have either:

- profits on speculative transactions or

- liabilities, other than equity and client deposits,

as tax base.

Such construction puts banks off engaging in frequent, risky speculative transactions (tax payable eats up the whole profit on a deal which renders such operations senseless) and persuades banks to seek most stable sources of funding and minimise their reliance on inter-bank loans.

Bearing in mind the above, it is hard to discern similarities Poland and developed countries where special tax for financial sector has been put in place. Firstly, the conduct of the Polish banking sector has been beyond reproach. Commercial banks in Poland have contained their business to the essence of banking, i.e. taking deposits and granting loans. No bank has been involved in speculative trading on a large scale (not fully matched client positions in banks’ books are too low to threaten banks’ solvency) nor in investments in dicey securities. No bank has ever had to bailed out from taxpayers’ money, nor even has been on a verge of insolvency. Commercial banks are strongly capitalised, have solidly performing credit portfolios and ensure clients’ deposits are safe. A bit of bitter word could be said of co-operative banks and credit unions, whose bankruptcies have been witnessed recently far too frequently. Lack of proper supervision of KNF on credit unions until 2012 and years of poor management are taking their toll on ill-run small financial institutions.

The main sin of commercial banks is that they indeed many times have not played their cards right and have not treated clients honestly. The example of CHF-mortgages foisted upon naïve borrowers, not eligible for such products, was just a tip of the iceberg. The other sin are excessive, compared to other sectors of the economy, after-tax earnings of the whole banking sector, reaching PLN 15 billion per year. An industry which produces no tangible goods for a laymen should not be allowed to continue to be a money-making machine, so let’s bring it to the heel.

The reason why banks and other financial institutions will be taxed in Poland is not to punish them for their misconduct, but to quickly raise money for merry social spending promised by the new government, actually for one 500 PLN child allowance programme. Most people believe fat cats from banks and their foreign owners are a perfect scapegoat, since it is the easiest to take away money from where there is plenty of them. Choice of tax base also reflects on taking the path of least resistance. In Poland the tax will be charged on banks’ total assets less equity less held government-issued securities less PLN 4 billion securities and the annual rate will be 0.44%.

Now let’s dissect some details on the tax:

1. State-owned banks will be tax-exempt. Currently the only bank eligible for such status is BGK (PKO BP is only state-controlled) – the government will not tax itself and its debt!

2. The PLN 4 billion allowance means favourable treatment for co-operative banks and credit unions whose conduct raises the most reservations. Good to see the government wants to enhance competition on banking services market and prevent the largest banks from growing too big to fail (top10 already are), but such mechanism means transfer of money from well-run to ill-run institutions.

3. The biggest drawback of the tax is equal tax rate for all assets, regardless of how risky they are (except for assets bearing sovereign risk). This means that the tax rate on a mortgage loan with LTV of 50% is equal to the tax rate on unsecured cash loan. This means the tax rate on a short-term loan to a prime corporate client will be equal to the tax rate on a long-term loan for a start-up (such are sometimes granted). The tax rate will be the same, while how much banks earn on different assets reflects those assets’ risk profiles. Equal tax rate is likely to push banks towards more risky lending, since income on the safest assets will not be satisfactory. Oddly enough, I have not heard this argument raised in the public discourse.

Now let’s examine where the impact of the tax will be the biggest. Common sense after reading point 3 from the paragraph below, or pure command of maths should tell you banks’ clients will feel the effects the most on products with relatively low risk and low margins. From what I observe, the costs will be passed on to customers in three ways:

1. Through higher prices of basic banking services which are inevitable for all individual and corporate clients (account fees, debit cards fees, transfer charges),

2. Through higher margins on mortgage loans, the least risky credit product offered in the retail banking. With automobile loans or cash loans where margins reach several hundred basis points and fees, commissions and obligatory insurance make up sizeable income, impact of 44 basis points banking tax will not be felt much. For mortgage loans running until now on margins even below 150 basis points the tax will eat up one third of the income. No wonder banks in unison have increased the cost of mortgage lending.

3. Through higher margins on loans for corporate clients with decent financing standing. Large companies until recently could easily obtain short-term funding for not much more than 44 basis points over WIBOR. Customers from that segment will have to accept higher cost of financing.

Now I wonder whether proponents of the tax in their calculations of budget proceeds have taken into account:

- lower CIT proceeds (higher interest cost and banking fees for businesses translates into lower tax base),

- lower VAT proceeds (households taking out new loans will spend and invest less),

- impact on GDP of worse performance of the property market (actually as a whole I view the impact positive, since cheaper properties are easier to buy without debt).

Negative selection (preference of banks to shift towards more risky assets with higher income potential) is just one aftermath of the new tax. The other is that for large-volume (>PLN 50 million) single credit exposures, especially those in foreign currencies, it will make sense to arrange the loan in Poland, but to establish as a lender another bank from a Polish bank’s capital group. Works on implementing such solutions are pending and I estimate this method of circumventing the new law might deplete the tax proceeds by several hundred million zlotys.

The only country in the EU to have followed the path of taxing banks’ assets is Hungary. The price to pay was heavy contraction in lending dynamics, spilling over to the whole economy. For no apparent reasons Hungarians are pulling out from the tax by decreasing its rate year-on-year.

Time to bite the bullet on it. Banking sector has been getting on well for many years, its returns are also impressive. The very idea of above-average taxation on it, as long as it is brought off wisely (a good example is copper tax for KGHM), would not bring banks to their knees (the very tax, passed onto clients would neither do). To make it wisely, i.e. without flawed disincentives, I would put forward two measures, more difficult to carry through than just taxing assets. Firstly, cut down on opportunities to transfer money to head offices via royalties, costs of services and other payments that artificially boost expenses and decrease pre-tax profits. Secondly, apply a higher CIT rate to financial institutions, but tax profits, not assets. I realise the latter is at odds with the former, so combining the two solutions does not appear too fortunate, but shows the direction which would bring the least harm to the economy.

The banking tax itself will not be an excessive burden, but if its effects are compounded by conversion of mortgage loans denominated in foreign currencies into PLN at “fair rate”, repercussions for the banking sector might be dire, since losses of PLN 30 billion of the industry as a whole would mean some smaller banks could go insolvent and their owners taking losses and walking away, leaving the Polish government and financial watchdog with the mess.

Worth noting what the “fair rate” is, since in the debate on president Duda’s proposal nobody has actually explained what the economic sense of this “fair rate”, calculated individually for every debtor is. In plain Polish, the fair rate is the CHF/PLN exchange rate to which CHF/PLN would need to soar right after loan disbursement and at which it would need to be fixed over loan’s life until now, to make sum of instalments in CHF and PLN (assuming the same loan margins and without discounting to account for time value of money) equal. In simple words the “fair rate” is the one at which a CHF-debtor is neither better-off nor worse-off than PLN-debtor.

Moreover next bankruptcies of ill-run credit unions are in the offing in the coming months. The Bank Guarantee Fund, with reserves accumulated since 2001, has been depleted by payments to aggrieved depositors (folks are lucky to benefit from Bank Guarantee Fund protection since recently thanks to prudent policies of the previous government) and the Fund now passes the hat round between banks to make up for the outflows.

The banking sector had its golden years in Poland. Those times will never come back and good for us, since if wealth is unequally divided between financial intermediation and real economy, economic development will not be sustainable. But if we go into another extreme and knock down institutions which facilitate flow of funds between depositors and borrowers, taking the credit risk away, we will knock down the whole economy. Bleak times ahead.

Winter wonderland

At long-last, the veritable winter has turned up. First days of January brought harsh frosts (day-time highs below –10C), yet the first winter episode was snow-free. The first proper snowfall was witnessed on Friday, 15 January; lasted since early afternoon until late evening and covered the ground with eleven centimetres of brand-new white powder. For comparison, maximum snow cover during the previous winter (on 9 February 2015) reached 4 centimetres (and melted right away).

The sight I woke up to behold on Saturday a week ago. While it had snowed temperature had been barely below zero, hence the snow was wet and thick. No wonder trees were bending under its weight. Temperature overnight had fallen to some –6C, hence shyly shining sun did not cause snow caps to drop.

Afternoon. After a bright morning sun has been occluded by clouds. I stroll around to gloat over the magnificence of winter. The sight caught from ul. Zimowa in NI brings to mind “White as snow” by U2. A pity we had not enjoyed such weather during Christmas. Peaceful, slightly dark, silent place. May the moment last!

Further up to Mysiadło, where side streets have not been cleared of all snow, rather it has been beaten and its compact layer is vehicle- and pedestrian-friendly. For inhabitants of terraced houses any bigger snow precipitation is a challenge, since front-yards and drives are too tiny to heap up masses of fallen snow.

Walking east, I get to premises of bygone PGR Mysiadło. Swathes of land covered with snow and a row of trees marking a boundary of the capital bring to mind… labour camps in Siberia. The association does not seem legitimate, since the only common element is a relatively large piece of flat land under the snow…

As I strut about towards ul. Puławska I notice heavy snow has not deterred motorists from moving about (I drove nearly 40 kilometres on that day, so why do I grumble?). Yet traffic jams congest side roads in Piaseczno. Here, clogged up ul. Wiśniowa, towards ul. Łabędzia, where a queue of cars before intersection with ul. Puławska is half a kilometre long. Situation is worsened by the fact some drivers use summer tyres useless in such conditions – setting a car in motion on ice is nearly impossible.

Here comes our saviour. Ul. Raszyńska in Piaseczno, tractor with a plough removes some of the snow from the street and puts down sand on it. Road clearance on roads governed by Piaseczno is a crying shame. Back yesterday, a week after the snowfall many roads were still covered with frozen slush…

And the outcome of the plough’s work. Worse than the day before. This is a regular ice, fortunately clearly visible, so less treacherous. Drive slowly, operate all pedals gently and use engine braking in advance to slow the car and provided no object cuts in on you unexpectedly, you should avoid going into a skid.

Here, an example of a frequent unsocial behaviour. The egg trader (or someone hired by him) has got rid of snow from their drive by shoving into onto the public street. The “move it away from myself (into no-one’s territory)” way of thinking is not what I put up with…

Last Sunday, level crossing in NI. Construction crews carry on working despite unfavourable weather. A weeks ago western track was ripped off nearly by the station in Nowa Iwiczna. Good to see works move on despite the winter.

And another snap of rail tracks, this time from ul. Mleczarska, the coal line. The Sunday was a gloomy day, yet the snow-covered earth brightened it up. Much healthier for one’s mood than a grey day with drizzle.

One more picture of snow-covered fields. Further from Warsaw in Mazowsze such landscapes splay out into the horizon. Here in the distance we see development in Stara Iwiczna and not very old housing estates in Piaseczno (where flat supply overhang is record-high, yet prices are not much lower than in some outer districts of Warsaw which enjoy better transport links with the city centre).

Monday, foggy morning seen from ul. Sarabandy. My journey to work lasted on that day nearly two hours (left home at 7:05, reached the office at 8:55), I guess longer than ever. Ul. Puławska was unusually congested; besides, waterworks crew dug up ul. Sarabandy at its northern end. I ended up driving there and back slowly and then, to avoid dense traffic on ul. Puławska, I turned right into ul. Karczunkowska and took a detour via Dawidy Bankowe (ul. Starzyńskiego was one huge ice rink).

Yesterday. Temperature overnight fell to –13C, morning greeted with clear blue skies and hard rime, setting on trees. Picturesque sights to lap up before they disappear for a while. Forecasters predict thaw is due tomorrow and within a fortnight winter is unlikely to return.

In the afternoon I took a bus to Pyry and marched into the forest. To my surprise, Las Kabacki was not chock full of ski-runners and walkers. Quite disappointing given the weather was conducive to enjoying gorgeousness of the winter which will soon be gone.

Heading towards the bus stop, I take a shot of ul. Puławska from the footbridge over the artery. Note the white shade of asphalt. Road clearance in Warsaw, compared to Piaseczno where the town’s services have buggered it up all along, seems beyond reproach, yet massive amount of salt on the streets are the price to pay. The footwear deserves watering when I get to the office and then at home, not to let salt mix up with the leather. The car looks horribly (in some spots the bodywork is virtually white) and is due for a decent wash-up as soon as thaw arrives. Roll on spring!

Triple Bee Plus, Outlook Negative

Friday evening. Negative news, as the one from August 2011 on US sovereign rating downgrade, are issued at the end of the working week after markets close, to let market participants “get over” the news and avoid turmoil when trading is resumed on Monday.

Standard and Poor's, one of three main rating agencies downgraded Poland’s sovereign rating from A+/stable to BBB-/negative. The move was par for the course; it was likely to happen, yet not now, but when effects of PiS government’s fiscal and (affected by them) monetary policies would impinge on creditworthiness of Poland. The most astounding aspect of the whole matter was not only the change in rating, but also the outlook. The blow was dealt without warning (i.e. changing rating outlook to negative while upholding the A- grade). On the same day Fitch upheld its A- grade, while Moody’s is bound to review the rating of Poland this year. The saddest aspect of the whole story is that we are witnessing the first downward move in the rating in the history of Poland (it was last upgraded in February 2007 when PiS was in power and upheld throughout eight-year rule of PO-PSL).

The justification (thank you Michael for sharing) of the rating chance indicates at sound macroeconomic foundations of the Polish economy and points at unsettling political moves which disrupt the system of checks and balances, i.e. calling into question independence or empowerment of institutions whose role is also to hinder reckless policies of the government. The impaired constitutional tribunal, paralysed by the new law, with 3 judges elected by the previous parliament and not sworn in, is, according to the recently binding law, not authorised to hand down rulings. Politicians of PiS have openly admitted support for monetary loosening was one of the criteria in choosing among candidates to Monetary Policy Council. Not a scenario creditors of Poland would wish on themselves.

Ministry of Finance in its press release dubbed the Standard and Poor's decision “incomprehensible” (worth reading, as the content of the release holds water, if you turn a blind eye on their command of English). PiS politicians and befriended economists argue rating agencies should focus on performance of economy only. In practice, every sensible lender, to the extent permitted by law, evaluates conduct of their borrower. If you lend money to a private individual you should assess not only their sources of income and spending needs, but also their lifestyle (in practice often prohibited by law), because paradoxically a poor granny who lives off a tiny pension, but dutifully repays her loan might be more creditworthy than a lad in this twenties who has no family and earns well, but leads a lavish lifestyle, goes on a bender every weekend and throws about money. If you lend money to an enterprise you should assess not only numbers in its financial statements, but also its corporate governance rules, strategy and its viability, management and its credibility.

Your opinion of Standard and Poor's assessment might be low. The rating agency has discredited itself many times, yet the grades it issues are respected around the world and affect perception of Poland’s credibility. You might agree with the downgrade or not, but higher yields on Polish bonds will be a fact, also the Polish currency might stay weaker for a while. At the end of the day the taxpayer will pay the bill. I bet on (blue) Monday the WIG20 index opens 3.8% down from Friday’s close (partly driven by dire trading in the US and falling prices of oil and copper) and closes 1.7% down from Friday’s close. I also expect a slight strengthening of PLN, though in mid-term it is likely to be under pressure of general negative sentiment around the world, except for impact of local policies.

You can also ask who pays Standard and Poor's. In general those are potential or existing holders of Polish debt, i.e. in practice financial institutions who (at least partly) rely on the rating agencies’ evaluation in their assessment of Polish bonds’ credit quality. Theoretically, Standard and Poor's should attempt to deliver the best service to their clients, because its role it to attempt to protect their interests as creditors of Poland. The truth might be different, as the example of worthless AAA+ ratings assigned to junk mortgage-backed CDOs best showed.

Finally, is it the revenge of “banksters” for introducing the financialinstitutions tax (president signed the law on Friday) or for the draft of currency mortgage law presented also on Friday? The exact timing is in my view coincidental, but indeed the downgrade might be a form of warning (get your hands off the financial sector) combined with punishment. But on the other hand, if you want to borrow money from somebody, you actually must agree on some conditions and constraints set by lenders and if they perceive you as more risky, your cost of debt will be higher. The principle is simple, if you want to mess with lenders, do not ask them for more money, but reduce your debts. PiS government wants to have a cake and eat it – they will need to borrow more (I do not believe the turnover tax, the financial institutions tax and improving VAT collection will be sufficient to fund 500plus programme, especially in the current macroeconomic environment), and simultaneously ask bankers in and tell them to kneel. I know many can’t wait to finally see bankers on their knees, but such sight is too beautiful to be true!

The Big Short - film review

Not a secret I am fond of films inspired by the financial meltdown in 2008. Quite naturally, plenty of such films (documentaries or fictional) were shot shortly after the crisis (Let’s make money, Inside job and Margin Call just to name those reviewed on PES), yet new productions come up even seven years after the climax of the market turmoil. The Big Short, which premiered in late 2015 is one of such pictures. So yesterday, instead of joining KOD in picketing for freedom of expression in the public media, I drove to a cinema to watch Big Short in the silver screen.

The films is generally based on facts and tells the story of a handful of astute investors who predicted the collapse of the U.S. subprime mortgage market. Same old story recounted, you would say. True, and because of this you can easily guess how the film would end. Yet, the insight into the crisis is shown from a rarely highlighted angle of those who predicted it in advance and for years were scorned. This, compounded with the word “fraud” (and its derivatives) uttered several times induces a question, whether perpetrators of the crisis were mercenary, greedy bankers attempting to makes us much money as possible before subprime time bomb went off, or did they genuinely believed they had invented a perpetual motion machine.

The simple answer to the question is, I believe, straightforward. As the Polish saying goes, Siebie oszukujemy w miarę potrzeb, innych w miarę możliwości (you deceive yourself as much as you need to, while you deceive others as much as opportunities permit).

The more complicated answer draws on flawed foundations of the banking system and the principal – agent problem. Let’s consider a situation when a specific market (may there be subprime mortgages in the United States or CHF-denominated mortgages in Poland) is getting dangerously red-hot.

1. As long as the market keeps rising, your stakeholders expect you to stay on the market (US investors wanted fund managers to invest in CDOs, head offices of Polish banks wanted them to grant CHF-denominated mortgages).

2. But if the circle keeps turning and you back out, you lose clients and earn less (therefore few fund managers liquidated their exposure to subprime securities before the market subsided, therefore few banks voluntarily gave up on CHF-denominated loans).

3. When the market collapses, everyone makes roughly equal losses, so as long as you do not fall short of your peers, your stakeholders put up with your mistake, as everyone has made it (investors across the world could feel duped, but for reasons different than mortgage market downfall, head office of foreign banks have not laid off a single executive involved in aggressive origination of CHF-denominated loans, though now these mortgages as a portfolio are loss-making)

4. But when the market crashes and if you have had the courage to swim against the tide and reap horrendous profits and your bets, would it be appreciated? History gives negative answer (ever heard of elated investors extolling their fund managers for earning them 500% profits, name a bank proud today of staying away from CHF-denominated mortgages).

While you leave out the leitmotiv of the crisis, mortgages, debt, derivatives, defaults and other notions confusing for laymen, this is a film about human psyche. Big short is about having the courage to swim against the tide. In 2005 someone betting against the mortgage market was dubbed a downright moron. Despite hard facts supporting the conclusion residential housing market fundamentally was bound to fall down, speaking it out publicly was out of favour. A tough test for one’s guts to stick to what you deeply believe, while everyone else laughs them off. A tough test for one’s humility to tell nearly everyone, including renowned financiers and bankers, are wrong. A tough test for one’s investment strategy as well, since the market can stay irrational longer than you can stay liquid.

Yet, before you realise market is in a bubble, craze has rubbed off on everyone around and valuations of assets have strayed from fundamentals, you need to realise dreams cannot come true if you cannot afford them. Dream of home ownership simply must be out of reach for those who cannot afford to repay a mortgage.

The problem of the financial system is that the price to pay for taking excessive risks is too low, while the price to pay for refraining from taking excessive risks is too high.

Marching towards common happiness

Those guessing I would be writing on personal life this time have been misled. I am launching a new tradition in which the first post in a month will be dedicated to attainments of PiS-government and their president (who officially is also the president of Poland). Since the blog is by no means objective, I will hold back from describing facts (assuming they are known, though all media, no matter if straightforwardly pro- or anti-PiS, seem to distort the reality to shape the communication to their audience) and focus on my observations instead.

Disclaimer: I am employed by a financial institution and hence my professional and financial well-being might be impacted by some of the events I comment on, especially by financial institutions tax.

PiS, in express-fast pace, have pushed their new constitutional tribunal law through both houses of parliament and their notary (Mr D.) signed the law without further ado, despite harsh condemnation from nearly all representatives of judiciary power and despite doubts whether the amendment was in breach of constitution. Brushing aside all the errors made by PO in June 2015 and the whole turmoil in late November 2015 around swearing in newly elected five tribunal judges, we need to see the end that justified the means. The tribunal, the strongest representative of judiciary power (legislative and executive already taken over by PiS) had to be pacified. The tribunal was not just a stronghold of elite which had ruled Poland over the last 25 years, it was a hindrance for the good change being brought about by PiS. This has been said by Mr Kaczyński. Whoever stands on their way to unfettered power will be wiped out. The notable style of manipulation is typical for PiS: sling mud at your enemy, make people believe your enemy embodies evil, to justify an impetuous crackdown on them.

The banking tax draft law has gone through both houses of parliament and now awaits the notary’s (my apologies to all notaries, you at least read documents before you sign them) signature. The banking tax (actually financial sector tax) will take effect on 1 February 2016 and will be equal to 0.44% of an institution’s asset, with allowance for assets up to 4 billion PLN and government securities. The tax should fetch proceeds of 4.4 billion PLN (wonder whether this calculation takes into account lower CIT inflows from banks and enterprises) to finance pro-family policies. Effects will be analysed here in a few months, let’s give them the chance. My only comment is that banks have worked hard for their miserable reputation, but the tax base the government has applied will bring more harm than good, since banks will have a disincentive to pump money into the economy, especially the asset base with the best credit profile (and running on the lowest margins) is likely to cease to grow. It is naïve to think banks will not pass the tax into customers (they are already doing so). To make the criticism constructive, it would be wiser to: (1) apply a higher CIT rate for financial institutions – let’s tax profits not assets, (2) curb numerous ways of transferring money into Polish institutions’ head offices (and thus decreasing pre-tax profits).

Similar is the status of the supermarket tax. The proponents have shifted from shop’s area to turnover as tax base, a move in a good direction. Critics of the new tax argue it will translate into higher prices. My view is a bit more sophisticated. It will be partly absorbed by retail chains, partly by customers, but those hit the most will be suppliers (small entrepreneurs), already now exploited by their off-takers having incomparably higher bargaining power. Dear small entrepreneurs who deliver goods to powerful retail chains, prepare for even lower margins and even more stretched out payment terms.

The media law, bringing public radio and television to the heel, is also likely to take effect before long. Public media, bastion of anti-PiS journalists, overly supportive to PO and Nowoczesna, will soon be brought into “balance” by nominees of the ruling party. The goal is to restore the balance in the public media. Still too early too assess the outcome of the new law. Let’s wait a few months to behold the cure!

The government is working to undo the reform pushing six-year-old children to start education. Finally, the defenders of the nation’s offspring will disallow the evil people to take away a year of childhood. Does not matter demographics is relentless, does not matter in most European countries children start schooling at the age of six (are Polish children intellectually inferior to them?). Most parents are happy. Instead, work should be done to make schools more friendly to six-year-old children, since teaching methods should be adjusted to the age of pupils.

The flagship project of the government, 500+ child allowance programme is in consultancy phase and likely to kick off in 2Q2016. The later the scheme comes into force, the bigger the relief to the public finances, so I hope its introduction is deferred by a few months more. Had the draft been ready as Mrs Szydło claimed during the campaign, while she waved a pile of documents subsequently shown to nobody, the progress of the scheme introduction would have been better. It needs to be noted, if PiS went back on its main promise, many of the voters, bribed by the 500 PLN monthly per child, supported PiS and secured outright majority in the parliament for the party. Once they turn their back on PiS, the party will be in a fix. By the way, if somebody offered me a job change in return for 500 PLN or 1,000 PLN monthly pay rise, I would laugh off and reject the proposal!

One thing that cannot be denied to the new deputies is that they work as arduously as no other parliament before. One thing I have learnt over five years spent in the corporate world is that while you work furiously fast (I have experienced it many times), the risk of making mistakes rises greatly. However, with all safety valves (independent president, independent judiciary power) disconnected, no stumbling blocks lie on the path towards lifting Poland from ruins into which it slid, run by PO-PSL government and president Komorowski.

On 22 October 2015, Mr Kaczynski said: To musi być czas pracy ludzi władzy. Polska niech się bawi, ale władza musi pracować. We must not forget those words. Prezes told us between the lines to have fun, mind our own businesses and let them take care of the country. The message is not to interfere, while they are doing their vicious job. Much of nation have turned out to be disobedient. Thousands of people taking to the streets to defend democracy are now displaying their strength and representing millions disgruntled with PiS machinations, but how long before they run out of steam? Meanwhile millions of other people are enjoying what they had been waiting up for – PiS bringing Poland into order. Waiting for the good change to come.

2015 in retrospect

Last days of the year, a short, idle period between Christmas and New Year’s Day (or even Epiphany). Days, when world nearly comes into a standstill; days when slower pace of life provokes one to look back into the passing year and (maybe more often) to make resolutions for the coming year. Customarily, we wish one another that the coming year is better than the passing and usually we think it would not take that much to make the wish come true. In fact, as a matter of principle, we under-appreciate positive developments from the past and over-estimate importance of those negative. Fair assessment of what we have lived through is generally hindered by our selective memories. Actually, 2015 was a year of ups and downs for me, yet as it comes to an end, positive outlook for 2016 brightens me up ;-)

The ups and downs pertain mostly to private life. I have (and dare to claim) successfully tried to temper the magnitude of both ups and downs, with lifting myself from being closer to the bottom being a far bigger challenge. I have made a tremendous work to get hold of myself from the “post-CFA blues” and break away from the life focused on merely getting by. This took me three summer months, the months, truth be told, I effectively wasted, genuinely doing nothing than carrying on. I functioned yet not lived. Then came the turning point. I signed up for dance classes (and continue trainings, though I sometimes have to bend over backwards not to stay overtime in the office) and want to develop this pastime activity in 2016. I also find no excuses for socialising, whatever opportunity comes up and no matter how tired or reluctant to meet people (both states sometimes inevitable in the daily grind) I am, I grab it. A human becomes a human only among humans, that is why interacting with people (in most situations) brings out positive energy in us. This all has instilled more self-confidence in me. You, as some of my friends, would probably argue, I had not needed my self-confidence to be boosted. This is kind of misleading, since what you see outside does not need to reflect what goes on inside.

In terms of work, I started off into 2015 with serious doubts whether changing a job had been a good move. With hindsight, I wrote that post shortly before settling down in the New Factory. First six months in the new company are about finding your ways around it, the next half-year period is for laying foundations of your position in the company, after one year, you begin to thrive and your credentials get reinforced. This timeline reflects my experiences from both The Employer and The New Factory. As of November I was relocated and assigned more duties and ended up working 60+ hours per week. The workload somewhat eased in early December (meaning I spent weekends without the company computer), but for instance I had to spend the whole evening on 23 December, well into the Christmas Eve, “saving the day” and with swear words flowing from my mouth (how foul-mouthed I have become over 2015). The blend of time pressure, stress and encroaching on private life my job offers me sometimes makes me want to literally yell. More and more often I wonder where this whole craze is leading me and what the benefit and the sense for me in it is. A friend to whom I talked on Wednesday (taking a break from “saving the day”) told me I am at the moment of deciding whether I make do with what I have (and rest on laurels with what I have achieved so far) and should ease up or I want to aim higher and carry on shining bright and patiently waiting to reap what I am sowing. The conclusion is basically wise and up-to-the-point, but the other question is who the reward comes to…

The noteworthy affair in 2015 was passing the third level of the exam and being awarded the Charter (along with other 78 other professionals from Poland who earned the Charter in 2015). To make a sincere confession, self-pride is mixed with regret. The fortnight before the exam was a nightmare. I got up every single day wanting to scream until my throat could not give any voice, wanting to burst into tears which could not flow from my eyes. And then, counting down days until 6 June, I fought battles not only against exam preparations, but also against my frail psyche. I did well on the exam (I consider it a miracle), but the price to pay was high. I am now a Charterholder and realise had I given up along the way, I would be angry with myself, the scenario worse than what I have gone through, since except for track record of roughly 1,000 hours spent on learning, I at least enjoy some kind of self-esteem. Against my own demons, I have carried the day.

The saddest moment of the year was my grandma’s departure in March. At the very beginning of the year we all knew it was unlikely should would celebrate her 90^th birthday in November. The very passing away actually brought relief to us, since grandma was slowly dying for two weeks and her suffering lasted unbearably long.

In the last quarter of the year, I began looking for a flat. One day in January I will try to write more on this, but the search resembles now my effort to find a new job taken in November 2013. This was the moment I knew I was bound to do something unless I wanted to go bonkers or totally burn out with The Employer. I had in mind a hasty and quick job change only to break out of the endurable workplace did not make much sense. Also spending roughly an equivalent of one’s four-year after-tax salary (on a relatively illiquid asset) requires some care. With the job change the outcome was that in the sixth month of fruitless search, the offer from the New Factory came up and both the New Factory and I were committed within seven business days from the first contact. I guess same will happen about the flat, when an opportunity comes up.

And far in the background… We have witnessed a makeover of Polish political arena. We have the new president and the new government, with outright majority of one party in the parliament, making extensive use of unfettered hold of power. Millions of Poles wholeheartedly support the radical agenda (and steps) of the new government, millions of Poles silently or outspokenly object it. I am more and more tempted join people who take to the streets and get involved in the politics (although for the same reasons why I conceal my identity as a blogger, I should hold back). 2016 will be a year full of twists of actions in the politics. I doubt it brings early election. PiS will not repeat the mistake from 2007 when they thought the early termination of parliament term and brought forward election would reinforce their rule. Now, without the burden of any coalitional partner, they are likely to wield power until 2019. Unless the civic discontent, brought about by all-out assault on democratic institutions and going back on pre-election promises, gets so intense that it overthrows the PiS government. But even if so, what then?

Angel's angle

Prompted myself to watch again “Wings of Desire”. Not just to behold Berlin divided by the wall, mere three years before it was crumbled. Not just to encounter the atmosphere crafted by Wim Wenders in his magnificent films. I have revisited the film to explore concept of angels and the whys and wherefores of their “presence” on earth.

An angel is invisible. I presume each of us has at least once dreamt of being invisible to somebody. What in some situations is a blessing, in the long run is a curse. Invisibility which allows you to be an unnoticed bystander who observes course of people’s lives means no human being pays attention to you, nobody talks to you, nobody touches to you, nobody interacts with you. As a result the only creatures you can have relationships with are fellow angels; in the eternal perspective no one but other lonesome companions.

An angel has insight into humans’ feelings. An angel knows what they think about, who they love, who they hate, what problems they cope with, what pleases them and what they fear. An angel knows all but an angel can do nothing about to relieve humans’ pains. An angel does not have power to solve people’s problems, cannot abandon their invisibility for a moment to talk to a human or to hug them. And after all, angels are familiar with human feelings only because they observe them, but not out of their own experience. They witness sadness of a bereaved human but they do not know how it feels like, because nobody they loved has even passed away. They witness sorrow of a lovelorn human, but they do not know how it feels like, since no one has even turned away their love. They witness incurably ill humans, but they have never gone down with any disease. They witness misery of a family who cannot make ends meet, but since they have never had to do with money and have never needed it, they do not know how being short of money feels like. An angel does not even know what the pain is, they have never felt it.

No wonder one of the angels staring at the fate of West Berlin’s residents one day, upon falling in love with a woman, decides to give up on all the traits of angelness he grows uncomfortable of and becomes a mortal human.

Thus I guess the purport of the film is that genuine feelings, including those most bitter, are the essence of humanity. Learning how to cope with the suffering teaches us how to handle love. Without experiencing the former you cannot appreciate the latter. Without feelings and without problems the life is empty. Do not dream of trouble-free, easy life. It is a trap! Trouble-free, easy life is not for humans!

So feelings are what matters the most. Do not suppress them, give vent to them, share them with fellow humans. And feelings drive emotions; both positive and negative. If we are affected by emotions, we are humans. And finally, by depriving themselves of emotions, humans turn themselves into robots, goal-oriented creatures, repeating tasks to survive, without seeking the essence of their humanity. As I grow older, day after day I am more and more appreciative of positive impulses and search for them to draw pleasure. I chase them and grab them whenever they are not out of reach. I hesitate many times, since not infrequently price to pay for the positive vibes might be too high. As I have been growing older, life has been teaching me, it does not need to be wise to reach the top one day and slide to the bottom the other day. Beware of that and do not get high at the expense of other people.

I wish and peaceful Christmas to all my readers!

Market update

Customarily, December on financial markets is hardly ever a season of bloodshed. Either everyone is celebrating, trading volumes are thin and markets are placid or fund managers are make use of shallow market to boost portfolio valuations before year-end. This year Santa Claus rally, if it is witnessed at all, will be at best considered a revival after the recent turbulent weeks.

The most frequently benchmark used for the Polish stock market its is large-cap index, WIG20, composed of twenty biggest, in terms of the market value, publicly traded companies in Poland. The index, with its historical high of more than 3,900 points recorded in October 2007 and this decade’s high of more than 2,900 in April 2011, has seen a few months of dreadful performance. In early May this year WIG20 peaked at 2,558 points, while on F11 December’s market close it dropped to mere 1,757 points, so it declined by 31% over 7 months. Raw numbers in theory should not bear a false testimony, yet what underlies the numbers might be biased enough to prompt market data recipients to jump to conclusions.

So before we do this, three facts:

- as of 11 December 2015’s close, WIG20 components accounted for 27.6% of the whole stock market in Poland, in terms of market capitalisation,

- the index is dominated by two industries: financial sector (Alior Bank, Bank Zachodni WBK, mBank, Pekao S.A., PKO BP, PZU) and energy (Enea, Energa, PGE, Tauron),

- the index is a price index, i.e. takes into account only price movements, but fails to account for return from dividends, while the yield of the index in the long-run is close to risk-free return or slightly higher.

The first arguments persuades you to think of another, more representative benchmark for the Polish stock market, the second should tell you performance of two industries might substantially affect performance of the index.

And indeed, the shares of banks and the insurer have been falling for the recent months, as valuations discounted imposition of financial sector tax, higher bank guarantee fund contributions as well as anticipated, yet for a while put back, conversion of FX-denominated loans unfavourable for banks.

Shares of energy producers plummeted because of their planned involvement in the bail-out of coal mining, extensive CAPEX needs, both factors trimming down their dividend payout capacity.

Shares of banks dropped by 30% since May 2015, shares of utilities declined by 40% since May 2015. Besides, two vital components of the index are KGHM, punched by falling copper and silver prices (not well offset by stronger USD) and Bogdanka, thumped by falling hard coal prices. No wonder then even if other 8 companies perform decently (difficult, if the market is perceived as homogenous by foreign investors), the index could not fare well…

The better representative of the broader market is WIG. While WIG20 retracted to levels last seen in April 2009, during post-crisis rally, WIG, a total-return index (takes into account dividend income), is two times higher than in February 2009, but fell by 23% from its peak in May 2015, meaning the Warsaw Stock Exchange has officially entered the bear market.

A justified question is whether the factors depressing Polish equities are of local or global nature. If you look at performance of S&P 500, no pattern similar to what has observed in Poland can be discerned.

The same if you peek at DAX30. Both Wall Street and Frankfurt contracted at the news of faltering Chinese economy, but both are still in bull market.

If the stock exchange predicts troubles in the future, it begins to do when the troubles emerge on the horizon and they did so in May 2015, when lots of market participants realised PO was bound to lose the parliamentary election and PiS, as they got hold of power, would tamper with the economy. Policies pursued by PO were also to blame, as they also had put forward a draft of FX-denominated mortgages conversion and they set off to exploit energy companies to rescue insolvent coal mines.

With hindsight I am grateful to the New Factory for imposing stringent trading restrictions on me which have put me off trading and prompted to terminate my brokerage account. Had the limitations not been in place, I would have several times attempted to catch the falling knife. With hindsight, I see I would have been worse off.

Moving away from Poland… Prices of Brent Oil (traded in London), after bottoming out early this year, have been falling since early summer, but recently they tumbled, best evidenced by the 9% drop within the last week. Excess of oil supply is likely to persist, extraction is unlikely to be cut down by OPEC members, while macroeconomic environment remains shaky. All these factors combined ward off the scenario of crude oil prices drifting to where they were before November 2014.

And a quick glance at the copper. Quotations of the commodity have been in the downward trend for nearly five years and had a tremendous impact on market price of KGHM shares (in early 2013 it trade above 190 PLN per share, today mere 61 PLN would buy such security). Now the Polish copper behemoth is nearing the verge of breaking even, while the promises of lifting the copper tax, made by PiS ahead of the election, are up in the air.

The Polish currency, at least in comparison with our stock market, is holding up relatively well. EUR/PLN pair, as dull as ditchwater over the last three years, has climbed towards 4.40 and forges ahead to break out from the range within which it stayed for too long.

USD/PLN, far more volatile than EUR/PLN, began its ascent in 3Q2014 and in early December 2015 crossed the level of 4.00. It deserves to be stressed however, that the driver of the incline is on the USD side of the pair. The American currency is sent up by buoyant US economy, dwindling commodity prices (negative correlation) and expected interest rate hike (FED meeting due in the coming week).

Unfortunately, I am not a future-teller and even if I were, I would not dare to advise you how to reap profits from what is happening on the markets. Given high expenditures in the offing, I am keeping all my savings at banks. But even with longer investment horizon, I would not bet on stock market recovery. Fundamentally the Polish economy is holding strong, but the extent to which it can be spoilt by zipperheads behind the wheel is unknown. By analogy, in first half of 2008 everyone thought given good economic situation, the bear market should have drawn to a close and stock valuations were bound for correction. Over the next months they fell by some 50%. What I am rather confident is that if WIG slides into 30,000 points (I doubt this is probable), equity valuations will be attractive in long-term perspective.

Sumienie mam czyste

I am proud on 24 May 2015 I voted for Mr Komorowski. Although my opinion on his (mediocre) presidency in the last months before his electoral defeat was not particularly high, with hindsight I have no doubt casting a vote for him was the best I could do then. Had Mr Komorowski been re-elected, he would have been a precious safety valve, an authentic guard of constitution and stumbling block for reckless economic decisions passed by PiS-dominated parliament. Today, when executive and legislative powers are wielded by nominees of one party, counter-balance can be struck only by judiciary power (attempted to be undermined,)and by private media (public one will soon be brought to a heel by PiS)…

I was not fond of the late president, Mr Kaczyński. We were worlds apart, his views of Poland were usually far cry from mine, yet he had principles he would abide by. Honestly admitting, I did not like him, but respected him as a head of state. When Mr Duda was taking the office, I wished him well. After he reprieved Mr Kamiński (in advance, since the court has not passed a legally binding sentence) and nominated five judges of constitutional tribunal elected by PiS, before it was been ruled three of them had been elected by PO-PSL government in line with constitutional order, I have lost respect for Mr Duda, who is more dependent on Jarosław Kaczyński than Lech Kaczyński was. Servile president is not a good president.

I am proud on 25 October 2015 I voted for Nowoczesna. PO, the most numerous oppositional party is, predictably, falling apart, picking up the pieces after the electoral calamity and struggling to find a new leader, while Nowoczesna stands out in terms of standing up to the mess PiS government and deputies are making. Nowoczesna has emerged as the only firm and substantive critic of the government. Thumbs up guys. No wonder in the recent polls Nowoczesna is the runner-up in terms of support, with 20% of the surveyed declaring to support them. In the meantime support for PiS dropped to 32% and for PO to 19%. For both parties this is a well-deserved outflow of voters…

Within the first weeks of holding the entire power, hollowness of economic agenda of PiS is slowly coming to the light. Out of the blue, PiS passed a new amendment to Personal Income Tax Law, levying 70% tax on sky-high severance package of executives departing from state-owned enterprises. Given the absurdly-high level of golden parachutes, the initiative is commendable and I would support it. But the ignorant authors of the law have forgotten that majority of executive work under managerial contracts, which means they are sole proprietors hired to run companies and hence are payers of Corporate Income (flat) Tax. Thus the new tax rate will beyond all doubt to a tiny minority of executives; those working under managerial contracts will be able leverage on the loophole to dispute the tax charges. On the other hand, if the government decreases the CIT rate for small companies to 15%, all the executive will pay even lower taxes. Here comes a good example how PiS helps the poorest!

The 500+ programme, the flagship project of PiS to give 500 PLN allowance for every second and next (and for poorer families also for the first) child, also lays bare declarations of ready draft laws were lies. Until now it is unclear who will be eligible for the allowance, whether it will be treated as taxable income and how many documents parents will need to submit to file for the allowance. In the meantime, the Labour and Social Policy minister admitted the allowance will make some poor families worse off, since if they receive the allowance, they will not be eligible for welfare aid. In the meantime, one of PiS politicians appealed to well-off people not to apply for the allowance, stating if they did so, it would be ignoble… The chap appeals to the rich not to take money they will be eligible for. Jaw drops open! Is Mr Karczewski just incompetent, or is he discrediting himself?

Financial sector and large-space shop taxes are to be introduced early next year. As for now, I am holding back from assessing the effects, however I still believe ruthless banks and retail chains with foreign capital will get the blow, but will not be hit the worst.

Now I am in a quandary, weighing up whether it is worse when PiS tampers with economy or with democracy. With slightly dismantled democracy Poland can still economically prosper if it not ill-run. With unwise economic agenda Poland might follow the path of Greece, yet civic liberties will be intact. As an economist, facing the choice of lesser of two evils, I would sooner let PiS tamper with the democracy rather than meddle into teh economy.

Having written all those bitter words, I must not forget to remind there are millions of Poles who genuinely support PiS in their pursuit of “reinstating law and order”. If I told the recent events are against the will of the nation, I would depart from the truth. The government has a (weak, yet any) mandate to pursue the changes, millions of Poles were waiting for the change which looms bleak and dangerous for me. We also must remember PiS can boast of the biggest stalwart electorate, estimated at 30%.

Waiting for the course of things to unfold, I witness the growing anger at how the government and the president are making use of power. Plus when it turns out points of economic agenda either are hollow promises, or do more harm that good, people who have voted for PiS with hopes for generous spending, will turn their back on them. The scenario of early elections if most people get fed up with PiS government is not as likely as in 2007, since now PiS hold an outright majority in the parliament, but if things go bad enough, people will topple the government. Nevertheless, because for such scenario to come to a pass, too much would need to be spoilt and I do not wish bad on Poland, I hope it does not materialize.

Each month I will be trying to dedicate one post to PiS in power, times are dreadful, but interesting…

The political mess has not brought me down. Clement weather (+10C and sunshine) and the fact this is the first weekend since the beginning of November I spend without company computer lift my spirit.