##reaching reforms undertaken by major stakeholders financial markets may experience significant volatility in the not - toodistant future, with potentially harmful consequences for global growth. the third risk to global growth is the avian flu pandemic. both the risk and the consequences of the worst - case scenario are impossible to assess, but the potential human and economic costs could be enormous. financial markets now let me turn to financial markets. the recent few years are marked by a significant growth in financial transactions, stock exchanges have risen, corporate and emerging markets spreads have tightened, the ratio of non - performing loans has dropped 8, 9. according to the bank for international settlements, private capital flows to emerging markets have reached the level last seen in 1997, before the asian crisis. inflows to european emerging markets have reached all - time highs. factors responsible for a sharp increase in capital flows to emerging markets can be divided into pull factors ( local fundamentals ) and push factors ( global liquidity, global cyclical factors ). while pull factors actually improved, and rating upgrades by moody ’ s outnumbered downgrades by three to one in 2005, they cannot fully account for the magnitude of capital flows to emerging markets in that year. for example, bis provides a measure of an average sovereign credit rating for emerging markets based on long - term foreign currency standard & poors ratings. while credit spreads fell to an all - time low, at the same time emerging markets sovereign ratings remained below their highest levels recorded in 1997. therefore we may conclude that push factors have been playing an important role in emerging markets. for example, the hedge fund community came to a view that in early 2004 the polish zloty was an obvious “ no - brainer ” trade, partly because it had depreciated significantly in previous years and partly because eu accession resulted in a significant and permanent drop in the country ’ s risk premium. in early 2005, hedge funds were telling me that the brazilian real was another “ no - brainer ” trade, as the central bank would have to keep high rates to control inflation and a good external balance indicated that the exchange rate could appreciate. in both cases, the polish zloty in 2004 and the brazilian real in 2005 were star performing currencies, and hedge funds pursuing carry trade and momentum strategies were important players on these markets. such a situation poses a true challenge for many central banks in emerging markets. they have to judge to what extent their local currency strength is a

##cive to keeping economic growth at a pace, which is consistent with the potential output growth, determined by the structural features of the polish economy. the fact that inflation and core inflation has stayed below the previous forecasts for a relatively long period may be an indication that the impact of the factors which may slow down the returning of inflation to the target in relation to that accounted for in the projection is stronger than previously assumed. factors which could potentially accelerate the return of inflation back to the target include a higher wage growth than assumed in the projection, provided it would not be accompanied by national bank of poland “ financial stability review report ”, warsaw, september 2005 national bank of poland “ financial system development in poland 2004 ”, warsaw, november 2005 h. koskenkyla, ed. “ finnish financial markets 2002 ”, bank of finland, 2003 monetary policy committee statement, 26 april 2006 sufficiently fast increase of productivity, further oil price hikes or a deterioration of the public finance situation in relation to that envisaged in the convergence programme. the council maintains its belief that the most favourable scenario for poland would be to implement an economic strategy focused on creating conditions which would ensure the introduction of the euro at the earliest possible date, which would be conducive to a higher long - term economic growth. ”, end quote. public finances prospects this brings me to the developments in public finances. the fiscal outlook over the medium - term future would be broadly positive, if it were not for substantial risks, mainly political, surrounding the deficit path. in 2005, poland recorded an esa ’ 95 deficit of 2. 5 % of gdp. this corresponds to a deficit of 4. 4 % of gdp with the pension funds classified outside the general government sector, which will be the binding methodology from next year onwards and which is therefore the relevant methodology for assessing poland ’ s future compliance with the european fiscal rules. this implies that poland is 1. 4 percentage points away from meeting the maastricht fiscal criteria. it is not a demanding medium - term consolidation target for an economy with an expected real gdp growth of close to 5 percent, providing a very good environment to reduce the ratio of public spending to gdp. it is worth noting that germany may achieve consolidation of this magnitude over the 2006 - 2008 period, without such a favorable growth environment. however, the convergence programme 15 presented by the government in january of this year, does not foresee fulfilment of the deficit criterion in the programme horizon ; in