* Gov't may shift assets from private funds to state
* Private pension funds are big players on Warsaw bourse
* Main index down 9 percent so far this year
By Adrian Krajewski
WARSAW, April 9 (Reuters) - Keen to keep its budget deficit under control, Poland is casting a covetous eye on the $85 billion of assets held by private pension funds. It's a situation that has got the funds and other stock market investors worried.
Struggling with the sharpest economic slowdown in decades, Poland wants to avoid its deficit breaching a threshold of 55 percent of GDP, which under the Polish constitution would result in painful spending cuts.
Cancelling the funds' treasury bond holdings, or the extreme scenario of nationalising their assets, could help plug the spending gap, at least in the short to medium term.
Prime Minister Donald Tusk has said details of the reform are due before the end of June. But anticipation of the changes, which could result in the sale of billions of zlotys worth of the funds' equity holdings, has already been weighing on the stock market.
Warsaw's main share index, the WIG20, is down 9 percent this year, twice the fall of its peers in the MSCI Emerging Markets index.
Poland's private pension funds, known as OFE, are among the biggest investors in companies listed on the Warsaw bourse and market players believe the pension reform could involve or result in cashing in at least part of their equity holdings.
Longer term, they would inevitably be less active investors in the Polish market.
Peter Attard Montalto, emerging market economist at Nomura, said taking assets out of the private funds could drag on Polish markets for years to come.
"The impact on equity and corporate debt is likely to be more negative over the longer term, as pension buying power is reduced," Montalto said.
A government grab of private pension funds is not without precedent. Hungary in 2011 nationalised some $13 billion of pension funds' assets, gradually selling their company stakes.
Poland's pension funds, who include international firms such as Aviva and ING, are deeply opposed to such measures.
"We say 'No, no, no'," Wojciech Nagel, head of the Chamber of Polish Pensions Funds (IGTE), said. "'No' to voluntary pensions, 'no' to liquidation of the pension funds and 'no' to a takeover of the pension funds' assets."
Poland has a hybrid pension system under which some state, company and employee contributions go into the state-administered pension fund ZUS, while other contributions go into private funds, known collectively by the Polish acronym OFE and which are guaranteed by the state.
Shifting some of the assets held in the private funds onto the state's balance sheet could allow the government to keep the budget on track.
Its measures to cap the spending gap have already included a cut in state pension contributions in 2011 to 2.3 percent of gross wages from 2.7 percent, though they were raised to 2.8 percent this year.
The government has not decided on details of the pension reform, but some market participants expect it will involve shifting at least some of the 269 billion zlotys ($85 billion) in assets held by private pension funds into a state vehicle.
The impact of such a move could be significant.
Private funds have equity holdings worth some 101 billion zlotys, including stakes in more than 60 percent of the companies listed on the Warsaw exchange, and which account for a fifth of the market capitalisation of eastern Europe's No.1 bourse.
Government officials have tried to reassure jittery markets by saying a complete liquidation of the private pensions funds, which also hold 126 billion zlotys in treasury bonds, is not on the agenda.
But the funds say that whatever happens, they fear it will not be good news for them.
"They (the government) may cut contributions again or cancel bond holdings, but when it comes to shares we're talking over 100 billion zlotys, which would either have to be nationalised or sold," a manager at a leading Polish OFE said.
"This time, a scenario of abolishing OFE seems still unlikely," the manager added. "But the general idea among market players is that the longer-run goal is to scrap us." ($1 = 3.1659 Polish zlotys) (Additional reporting by Agnieszka Barteczko, Karolina Slowikowska, Marcin Goettig and Pawel Bernat in Warsaw, with; Krisztina Than in Budapest; Editing by David Holmes)