Poland's public debt may rise if court rules against pension reform

WARSAW, Nov 4 (Reuters) - Poland's new government may face a significant rise in public debt if the Constitutional Tribunal rules on Wednesday that its pension reform was illegal, the election winner's senior lawmaker said.

Poland reduced its public debt by overhauling the pension system in 2014. The country moved 153 billion zlotys ($39.34 billion) of bonds from privately owned funds to the state-run Social Security Office, effectively halving the value of assets managed by the private funds.

Former president Bronislaw Komorowski and former ombudsman Irena Lipowicz have asked the Tribunal to decide whether certain aspects of the reform were legal. The Tribunal is expected to give its verdict at about 15:00 GMT on Wednesday.

"We're awaiting the Tribunal's decision with a concern ... if the Tribunal decides that regulations concerning pension funds are unconstitutional, we would face a debt explosion, that would rise by 150 billion zlotys," Henryk Kowalczyk, the senior lawmaker from the Law and Justice party, told Reuters.

"Debt servicing costs would rise significantly. It (Other OTC: ITGL - news) is hard to imagine what one could do in such a situation," Kowalczyk said.

The previous government's 2014 reforms shifted the assets from the pension funds to the state balance sheet. That reduced public debt by about 8 percent of gross domestic product GDP, giving Warsaw more scope to borrow and spend.

Poland's public debt stood at nearly 48 percent of GDP in 2014, according to local accounting rules. The country has a constitutional debt ceiling of 60 percent of GDP. Breaching it would trigger drastic budget cuts in subsequent years.

Before the 2014 overhaul, private funds held assets worth about one fifth of Polish economic output and were among the biggest investors on the Warsaw bourse. Since the reform, the Warsaw Stock Exchange main index has lost around 10 percent. If the reform is ruled unconstitutional, shares may rise, according to traders.

Alternatively, Poland's currency, the zloty, may strengthen if the Tribunal does not find the reform was illegal.

Pension funds assets stood at 147.5 billion zlotys at the end of October, according to the Analizy Online investment fund performance tracker. ($1 = 3.8890 zlotys) (Reporting by Pawel Sobczak and Marcin Goclowski; additional reporting by Jakub Iglewski; editing by Larry King)