Jan Cienski in Warsaw -

The Warsaw Stock Exchange is pulling out of talks over a merger with the CEE Stock Exchange Group, operator of the Vienna Exchange, scrapping more than a year of negotiations over a tie-up between the two bourses.

The unexpected decision comes from Pawel Tamborski, the WSE's new chief executive and a former deputy treasury minister.

“Following an in-depth analysis of available options of regional growth and taking into account the high growth potential of the Polish economy and its capital market, WSE has decided to focus on organic growth at this time,” the WSE said in a statement released on Tuesday evening.

The Vienna-based CEESEG, which operates bourses in the Austrian capital, Prague, Budapest and Ljubljana, told Reuters that it still sees a chance for a link with the WSE. The WSE has overtaken the Vienna bourse as the region's largest, largely thanks to Poland's dynamic economic growth in recent years.

The Polish treasury ministry, which owns 35 per cent of the WSE, but controls 51.7 per cent of voting shares, issued a statement supporting Tamborski's decision, saying it had been driven by economic considerations.

The merger idea had been strongly supported by Tamborski's predecessor, Adam Maciejewski, who felt the WSE had to take part in the broader consolidation trend for European exchanges.

The WSE had long been hesitant about foreign involvement, in large part because until its IPO in 2010 it was almost completely state owned. That made it a problematic partner for the mostly private exchanges in other central European countries.

While the WSE concentrated on its domestic market and in attracting foreign listings to Warsaw, Vienna took a different tack, buying up smaller CEE bourses to create a group that rivals Warsaw in size.

Maciejewski felt that a tie-up with Vienna, a merger in which Warsaw would probably have been the senior partner, would allow for market consolidation across the region.

However, in Tuesday's statement, Tamborski said that reforms to the Polish pensions system had a smaller than expected impact on the WSE, which improved the market's prospects. The government has largely gutted privately run pension funds, which had been major investors in stocks.

Tamborski's decision leaves open the question of where Warsaw will find future growth. The pension funds are a fraction of their former size, and will no longer buttress the bourse as they had in the past. The Treasury Ministry's privatisation programme, which had  led many state controlled companies to list on the WSE, is also winding down.

Talks between Warsaw and Vienna were complicated by Vienna's ownership structure. The CEE exchange group's shares are widely dispersed among Austrian banks and insurance companies, some of which were keen on selling their stakes to Warsaw. But striking an agreement among all the shareholders was very difficult.

The WSE controls almost 60 per cent of share trading in central Europe. The bourse has 463 listings on its main market, with a domestic capitalisation of €150bn. Daily share turnover comes to about €38bn.

The Vienna-based group has a market cap of €133bn and daily turnover of €38bn.