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Governments in Eastern Europe increase bond issuance to record levels. The supply of local and international bonds has increased this year. Bond sales on international markets hit a record $36bn for the region’s most active issuers, led by Poland and Romania. The last country in the region to access international markets was Serbia. This week it raised $1.5 billion.

Budgetary problems of Eastern European countries are exposed

Analysts at ING Bank NV estimate that Poland will have to increase bond issuance later this year. Most likely, it will compete with Saudi Arabia for the title of the largest Eurobond issuer among emerging markets in 2024. The Czech Republic is one of the few Eastern European countries not facing funding pressures on the fiscal side.

“While the situation remains manageable, demand is falling and data suggest outflows by foreign investors.,” say analysts at ING.

Budgetary problems of Eastern European countries are exposed by record bond issuance

In addition to domestic economic problems, the authorities responsible for public debt management also have to cope with the changing economic context. This points to a postponement or limitation of interest rate cuts this year by the major central banks. This reduces the attractiveness of riskier assets. Borrowing costs have increased for issuers in the region. One example is Hungary, where yields on 10-year local currency bonds have risen by up to 100 basis points.

The European Central Bank on Thursday lowered its key interest rate for the first time in five years. Officials at the institution warned that they would not rush into further cuts. Even greater uncertainty exists in the US. Inflation has forced investors to revise their expectations for monetary policy easing.

“Demand has not been strong because the Fed’s stance has not allowed additional funds to go to bonds issued by emerging countries,” says Viktor Szabo, fund manager at Abrdn Plc

According to the European Commission’s latest estimates, Poland, the largest bond issuer in Eastern Europe, could record a budget deficit of 5.4% of GDP this year. That’s up from a deficit of 5.1% of GDP in 2023.

Hungary’s budget deficit rose to $7.2 billion in the first four months of the year. Hungarian economy minister Maton Nagy promised last month to reduce the deficit without resorting to austerity.

The government in Bucharest is also struggling to cut spending as it faces pressure from trade unions to raise public sector wages ahead of parliamentary and presidential elections later this year.

The Czech authorities want to return to a conservative fiscal stance and reverse the wave of borrowing during the pandemic. This fact despite public outcry over spending cuts and tax increases.

“The Czech Republic was the only one to carry out a real fiscal adjustment, reducing the deficit by one percentage point in the first four months. The fiscal situation is unfavourable in Poland, Hungary and Romania, but I think Hungary will announce new measures after the European Parliament elections,” said Viktor Szabo.

Photo Source: wikipedia.com

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