Polish Toledo

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Thursday, March 31, 2011

Poles: No Appitite for Debt

nieprzyjemny smak

Throughout the economic crisis plaguing the world for nearly three years, Poland appears to be an island paradise surrounded by a sea of red ink flooding the world. As others found out the hard way, unwarranted risk and the bundling of financial derivatives are dangerous to all aspects regarding quality of life. The wheeling and dealing that caused the bubble to burst caused immense damage across the globe causing hardship, pain and in some countries - riots, with more to come.

Could nations have escaped the intensity of economic damage and the protests that are getting more hostile across the globe?

The unique circumstances in Poland imply the whole bloody mess was easy to avoid.

Readers of this column over the last few months will remember Poland was the only EU country to post Gross Domestic Product growth in 2009 when every other member of the 27-nation bloc declined by an average of more than 4.5 percent. Continued growth in 2010 made Poland the only back-to-back year winner of an expanding economy.

The reason Poland stands head and shoulders above its neighbors and the United States for that matter is due to three basic things: Disciplined banking principles, a sound government fiscal policy and perhaps most importantly a way more cautious approach to personal debt. Essentially, Poland’s economy profited from risk moderation on every level including how individual households conducted their financial affairs.

When the bubble burst in 2008 Poland’s household debt averaged only 16 percent of GDP. Contrast that figure with 109% for Great Britain, 70% in Germany, 80% in Japan and 95% right here in America.

While property prices continue to be at the heart of the world’s economic catastrophe, the Polish real estate market did fairly well to protect wealth instead of destroying it.

With out a doubt Polish housing stock and quality of life accelerated at break neck speed after the fall of Communism and state controlled economy. One thing that lagged behind during the transition to free markets was the mortgage industry. Consequently, most homes were purchased with cash from savings or what could be raised from relatives. Mortgages in most other EU countries constituted more than half of GDP, while in Poland it was scarcely 10 percent
The individual fiscal discipline demonstrated by Poles was matched by Polish banks, which maintained firm lending standards and rejected subprime loans. And, what a unique situation: Politicians kept their noses out of the lending arena.

Double digit increases in industrial output, along with vigorous job creation, increased exports and solid wages provided secure levels of Polish household income. That led to brisk consumption of goods and services creating a good economy. These are the factors that kept real estate values stable. Property values in Poland declined only a miniscule amount.

Happy Polish super star
Ewa Sonnet shows off  her assets
While families even in the USA were struggling with household finances, Poles actually increased their bank savings accounts by double digits. Those increased deposits kept the Polish banks strong on their own merits while bailouts were as common as perch in Lake Erie in other countries.

Foreclosures and nonperforming loans even through the worst part of the economic meltdown were significantly lower than 5 percent while other nations saw defaults of up to 30 percent or more.

If you remember back to the day of busia and dzia-dzia, you might remember they were more likely to plop down cash than to buy on credit. They were credit worthy, but they tended to avoid debt because they didn’t trust it. Given the fate of Poland during the 20th century one could never predict what tomorrow might bring except the comfort in knowing there was no debt hanging over their heads like the sword of Damocles.

Easy credit makes us fat and lazy expecting things to come easy. But, as they say: easy come, easy go. Poles comprise a lean, mean economic machine. Taking a lesson from Poland and trimming the taste for debt is a good thing for all nations to consider.

Smacznego certainly should not apply to a plate full of debt.

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