Poland considers "guarantee fund" to solve debt quandary

WARSAW (Reuters) - Poland's government is considering setting up a fund which would use state-owned stakes in blue chip companies as collateral to encourage private investors to fund infrastructure projects.

Two sources familiar with the proposal have told Reuters that money raised through the "guarantee fund" would be used to help stimulate growth and job creation at a time when the Polish economy, the biggest in eastern Europe is slowing sharply after years of defying the slump elsewhere.

At the same time, the fund could be designed in a way that its finances would not be part of the public sector and would therefore not raise debt or deficit levels, a key concern for an emerging market aspiring to join the euro zone in the future.

Both sources, who spoke on condition they not be named, underlined that the creation of the fund depended on a final political decision. They said there were still some doubts about its fate because of strong resistance from some ministries.

Government officials declined to comment on the idea.

The Polish proposal is modelled on funds already in operation in Brazil and South Korea which use state-controlled assets to guarantee private sector investment.

"This could be a major boost for the weakening economy," said one of the sources.

"The fund could be injected with about 10 billion zlotys ($3.15 billion) worth of assets of companies (in which the state has a stake), such as KGHM, PKO, Lotos or PKN, which, thanks to financial leverage, could yield as much as in 50 billion zlotys to be used as guarantees."

"It's not 100 percent sure yet. There is resistance," the source said.

KEEPING DEBT DOWN

Poland has so far been resilient to the global financial crisis, growing by 4.3 percent last year. It is the only European Union member to avoid recession since the 2008 Wall Street crash.

But its economic success largely came thanks to an unprecedented infrastructure programme ahead of the Euro 2012 soccer tournament it co-hosted earlier this year with Ukraine.

The government, with the help of billions of euros from EU aid funds, pumped almost 100 billion zlotys into the economy through programmes to build roads and stadiums.

Now though, the economy is slowing abruptly to 2.4 percent in the second quarter and some economists - though they are in a minority - say it may face recession in early 2013.

The government cannot use the classic response of pumping money into the economy because EU funds will dwindle until the next round of financing in 2014, and because it is committed to cutting the deficit to around 3.5 percent of GDP this year from 5.1 percent in 2011.

Poland has little flexibility on this because investor confidence and Poland's sovereign ratings hinge on its deficit discipline, and because Warsaw must stick to the target if it is to join the euro.

The fund being proposed would allow Poland to get around this problem. The fund's finances could be treated as private, so the country's debt levels would not be affected.

"The idea behind the fund was finding a way to get a huge infrastructure programme going to support growth, the labour market and the troubled construction sector without burdening the state-coffers, debt and deficit," said the second source.

The proposal under consideration within the government is based, one of the sources said, on a paper published last year by an economic think tank, the Gdansk Institute for Market Economics, that outlined what it called a "Guarantee Fund for Infrastructure Development."

Private investors are often reluctant to put cash into infra-structure projects because they take a long time to deliver a return and there are political risks involved.

"The fund would take over such risks, making these investments more attractive and cheaper for private investors," said the second source. "Maybe the fund could even lead to a serious reduction of the deficit, with investment spending shifted to the private sector."

(Reporting By Karolina Slowikowska. Editing by Jeremy Gaunt.)

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