Emerging Europe

US ties ‘worth nothing’: Red faces in Poland at tapes

Market instability could be problem: Poland central bank
Key Points

A recent controversy over leaked tapes of Polish government ministers' conversations has deepened – with the scandal threatening to escalate further this week.

Radoslaw Sikorski, the country's foreign minister, not only says that the country's relationship with the U.S. is "worth nothing" in tapes of a conversation with former finance minister Jacek Rostowski but even compares Poland's position to slavery and, more crudely, giving a "blow job."

The leaked conversations, reported by Poland's Wprost magazine, will all make the next summit between the two countries rather awkward.

Poland is seen as a key ally for the U.S. in the region, particularly since the collapse of relationships with Russia following the Ukraine crisis. Poland was one of the first European countries to condemn Russia's actions during the crisis. The leaked recorded conversation appears to have taken place before Russia's annexation of Crimea.

Last week, the leak of a conversation between Poland's central bank governor and its interior minister, apparently plotting to overthrow Rostowski, sparked fears of political instability in the country, which is facing elections next year.

While Sikorski's position seems to be under threat, there still seems to be confidence in the marketplace that Prime Minister Donald Tusk can ride out the storm.

Tusk told reporters Monday: "I have no doubt that the tapes were aimed at destabilizing the government" and added that he would not be "forced" to sack ministers.

"Today's leaks were milder than expected (regardless of the implications for Sikorski); if there were suggestions of corruption (rather than just foul comments on international allies) that would have been more significant for the government stability," Otilia Dhand, vice-president, Teneo Intelligence, told CNBC via email.

The real worry is that there is more scandal to come.

A market in the center of Warsaw, Poland.
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Wprost is also planning to release tapes from a meeting between Jan Kulczyk, Poland's richest man, and Pawel Gras, secretary of Civic Platform (PO), Tusk's party, around the privatization of chemical company Ciech, according to Michal Majewski, a reporter from the magazine.

The most important player to watch right now, according to Teneo, is junior coalition partner PSL, who might use the excuse to exit their coalition with an increasingly unpopular PO.

If PO loses popularity, voters may turn to the conservative Law and Justice (PiS), led by Jarosław Kaczyński, whose tenure as Prime Minister was marked by worsening relationships with Russia and Germany. Kaczyński may be best known to Westerners as the twin brother of deceased President Lech Kaczyński.

Poland has been one of the main beneficiaries of bond investors raising their emerging markets holdings in the past few months. Movement in its 10 year bond yields, which moved up slightly to 3.685 percent as the tapes emerged, has been kept relatively low, despite the crisis, as the environment for central European bonds is still seen as "relatively benign", according to currency strategists at Citi.

"The anchor of political stability in Poland is fast eroding at a time of mounting east-west tensions over Ukraine and increasing uncertainty about the prospects for economic reform in Poland," Nicholas Spiro, managing director at Spiro Sovereign Strategy, told CNBC.com.

-By CNBC's Catherine Boyle