Does Poland Need A Domestic Alternative To The SAFE Programme

(MENAFN- ING) Poland applied for €43.7bn from the EU's €150bn programme

Poland applied for €43.7 billion from the European SAFE (Security Action for Europe) programme to invest in defence and revitalise its military-industrial capacity. The bill, which implements SAFE in the Polish legal environment – including the establishment of a special purpose vehicle (SPV) to operate SAFE funds – has been adopted by parliament and forwarded to President Karol Nawrocki, who must either sign it or veto it by 20 March. There is a vibrant local debate happening now – whether to choose, ie SAFE programme provided from EU common debt or some other independent funding scheme, based on FX debt issuance, which does not entail conditionality.

Proposal named Safe 0%

There is also a new proposal coming from Polish President Karol Nawrocki. It is called a domestic alternative to SAFE, allegedly offering financing at a 0% cost and supported by the central bank.

While Governor Glapiński has not stated clearly the details of the scheme, President Nawrocki's advisors explained what the proposal entails. They propose using sell-buy-back operations on gold, to realise the profit on rising gold prices and send the proceeds to the budget or the Armed Forces Support Fund, which operates within the state development bank BGK.

The National Bank of Poland governor said the key pre-condition is compliance with the central bank's accounting rules, and also keeping the actual level of the reserves unchanged.

Current legal framework

The Polish Constitution prohibits the direct financing of the fiscal deficit by the central bank (Article 220(2)). At the same time, 95% of the National Bank of Poland's (NBP) profit is transferred to the state budget, according to the Act on the National Bank of Poland. The central bank's profit is generated primarily from the return on its reserves, composed mainly of foreign government bonds, as well as from exchange‐rate valuation and seigniorage. Assets on the central bank's balance sheet (eg, gold or govies) are not marked to market, so capital gains on foreign government bonds or gold are realised only when they are sold at a price higher than their purchase cost.

Potential alternative schemes to European debt from SAFE

1) Taking profit on gold

From a legal standpoint, taking profit on gold appears to be doable. The NBP could realise profits via buy-sell-back operations of gold holdings, currently exceeding 500 tonnes. The idea is to recognise the profit on gold valuation in the NBP books, while leaving the gold holding unchanged. In the second step, it will work with the government to pass legislation directing the proceeds exactly to the military fund, not the general budget. However, we see a few caveats here. One of which is that such funds would not become available until mid‐2027, whereas the first disbursements from the EU SAFE mechanism are expected as early as March.

2) Bond purchases by the National Bank of Poland

The public media also mentioned a second option, ie the NBP may purchase bonds issued by the Armed Forces Support Fund or another military-linked special purpose vehicle. But the NBP governor rejected this option and said quantitative easing (QE) during the pandemic was an extraordinary operation in special conditions, when the reference rate was close to zero and the economy was facing the risk of recession. In the current environment, we are far from that extraordinary situation and QE-like operations are not possible.

Bottom line

Although the proposed sell-buy-back operation on gold should be de jure compliant with the central bank's accounting rules, de facto may be perceived as a tricky from the credibility side and backfire via higher public debt financing costs. Poland is gradually returning to global investment maps and rebuilding its credibility, which we can see in inflows on equity and recently the Polish government bond market. We find the proposal of SAFE 0% as counterproductive in that environment and rather unlikely to be implemented.

An alternative to the SAFE 0% proposal is the SAFE debt from the EU, which offers low‐cost financing outside the sovereign debt market – a critical consideration given that Poland is already issuing substantial volumes of government bonds. In the current geopolitical environment, characterised by elevated risk premia, including those stemming from tensions such as the war in Iran, access to rapid, predictable, and stable funding through the EU SAFE programme is of key importance.

We admit Poland has a high level of central bank reserves and, at the same time, a floating exchange rate. Finding legally sound and economically viable solutions to trim reserves to finance strategic purchases or reduce foreign debt should be on the agenda and authorities may explore such options.

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