Bond Risks Pile Up in East Europe Amid $34 Billion Sales Spree

The bond market in Central and Eastern Europe (CEE) has witnessed a significant surge in issuance, with $34 billion in sales in the first quarter of 2022. However, this growth comes amidst rising risks and uncertainties that investors should be aware of. This article will delve into the specific risks CEE sovereigns are facing and how they differ from those in other regions, as well as the role of EU fund allocations in addressing these risks and improving their absorption.



CEE sovereigns are facing several specific risks that set them apart from other regions. These risks include:

1. Economic Downturn and Higher Inflation: Protracted stagflation in advanced Europe could amplify the downturn in the CEE, likely pushing most CEE economies into a full-year recession in 2023 and increase inflationary pressures. This scenario could weigh on CEE sovereigns' fiscal, external, and monetary profiles (Source: S&P Global Ratings).
2. Reduced Ability to Benefit from EU Transfers: CEE governments' reduced ability to benefit from EU transfers due to delays in fund allocations and constraints on their absorption by governments could also pose a risk to CEE sovereigns (Source: S&P Global Ratings).
3. Elevated Fiscal Deficits: Loose fiscal policies risk keeping deficits wide, pushing up government debt, and posing a risk to CEE sovereigns (Source: S&P Global Ratings).
4. Balance of Payments Pressures: High energy costs, slowdowns in key trading partners, and loose fiscal policies risk fuelling current account deficits and weakening external liquidity and exchange rates, posing a risk to CEE sovereigns (Source: S&P Global Ratings).
5. Suboptimal Monetary Policy Choices: Suboptimal monetary policy choices amid high uncertainty and tight labor markets could also pose a risk to CEE sovereigns (Source: S&P Global Ratings).

These risks are specific to CEE sovereigns due to their geographical location, economic interdependence, and dependence on EU funds and energy supplies. The escalation of the Russia-Ukraine war could amplify these risks and impose greater macroeconomic costs on CEE sovereigns (Source: S&P Global Ratings).



EU fund allocations play a crucial role in mitigating the risks faced by CEE sovereigns, particularly in the context of the Russia-Ukraine war. These funds can help address risks such as a deeper and longer economic downturn, higher inflation, and balance of payments pressures. However, there are concerns about delays in EU fund allocations and constraints on their absorption by governments. To improve the absorption of these funds, the following measures can be considered:

1. Accelerating fund disbursement: The EU can expedite the release of funds to CEE countries to help them address immediate needs and mitigate the impact of the war. This can be achieved by streamlining administrative processes and providing clear guidance on fund utilization.
2. Flexibility in fund usage: Granting CEE countries more flexibility in using EU funds can help them tailor their spending to address specific challenges and priorities. This can be done by expanding the eligible expenditure categories and allowing for more discretion in fund allocation.
3. Capacity building and technical assistance: Providing technical assistance and capacity-building support to CEE governments can help them better absorb and manage EU funds. This can include training programs, expert advice, and the provision of specialized equipment or software.
4. Coordinated policy responses: Encouraging CEE countries to coordinate their policy responses and collaborate on regional projects can enhance the impact of EU fund allocations. This can be facilitated through regional initiatives and platforms that promote cooperation and knowledge-sharing.
5. Strengthening institutions and governance: Improving the institutional capacity and governance structures of CEE countries can enhance their ability to absorb and effectively use EU funds. This can involve supporting reforms in public administration, strengthening anti-corruption measures, and promoting transparency and accountability.

By implementing these measures, the EU can help CEE countries better address the risks they face and improve the absorption of EU fund allocations. This, in turn, can contribute to the overall stability and resilience of the CEE region in the face of the ongoing conflict and other challenges.

In conclusion, while the bond market in CEE has witnessed significant growth, investors should be aware of the specific risks faced by CEE sovereigns and the role of EU fund allocations in addressing these risks. By taking the necessary steps to mitigate these risks and improve the absorption of EU funds, CEE countries can enhance their economic resilience and stability.