Rising Debt Vulnerability in EBRD Member States: Implications for Emerging Market Debt Portfolios

The European Bank for Reconstruction and Development (EBRD) operates in 37 countries across Europe, the Middle East, and Central Asia, promoting market-oriented reforms and sustainable infrastructure projects. However, beneath its developmental mandate lies a growing risk: rising debt vulnerabilities in its member states. These vulnerabilities threaten not only the economic stability of individual nations but also the resilience of emerging market debt portfolios.

A Perfect Storm of Debt Challenges

According to a 2025 IMF policy paper, emerging markets and developing economies face "elevated debt vulnerabilities and significant financing challenges" from 2023 to 2025, driven by surging debt service burdens and high external refinancing needs Debt Vulnerabilities And Financing Challenges In Emerging Markets And Developing Economies^[1]. The World Bank's 2023 International Debt Report underscores this trend, noting that developing countries spent a record $443.5 billion on public debt servicing in 2022, with IDA-eligible countries alone paying $88.9 billion—a fourfold increase over the past decade 2023 International Debt Report - World Bank Group^[2]. For EBRD member states, these global pressures intersect with domestic fiscal strains.

The EBRD itself acknowledges that economies like Egypt, Jordan, and Ukraine are grappling with high public debt and elevated government interest payments as a share of GDP Growth in EBRD regions to hold steady under global pressures^[3]. Borys Javorcik, the EBRD's Chief Economist, warns that public debt in these countries is "very high"—comparable to levels observed in 1990 Economic Growth Edges Higher for EBRD Countries but Tariff Threat Looms^[4]. This is particularly alarming given that debt service costs now consume a significant portion of government budgets, limiting fiscal space for critical investments in healthcare, education, and infrastructure.

Global Forces Exacerbating Local Crises

The debt challenges in EBRD regions are compounded by external shocks. Rising U.S. import tariffs and intensified competition from China in export markets have eroded growth prospects, forcing countries to rely more heavily on external financing Growth in EBRD regions to hold steady under global pressures^[3]. Meanwhile, global interest rates remain elevated, with the Bank for International Settlements (BIS) highlighting that debt service ratios (DSRs)—the share of income used to service debt—are critical indicators of systemic risk Corporate Debt Service and Rollover Risks in an …^[5]. In the euro area, for instance, 8.4% of corporate loans now have an interest coverage ratio below 1, signaling severe financial stress Corporate Debt Service and Rollover Risks in an …^[5]. While EBRD member states are not all eurozone members, similar dynamics are emerging, particularly in sectors reliant on floating-rate debt.

Implications for Emerging Market Portfolios

For investors, the implications are clear. Debt service shocks—sudden spikes in repayment obligations—could trigger defaults or currency crises in vulnerable EBRD member states. The 2023 UNCTAD report notes that 54 developing countries, nearly half in Africa, dedicated at least 10% of government funds to debt interest payments in 2023 Debt crisis: Developing countries’ external debt hits record $11.4 trillion^[6]. If EBRD regions follow this trajectory, portfolios concentrated in sovereign or corporate bonds from these countries could face significant losses.

Moreover, the interconnectedness of global markets means that spillovers from one defaulting nation could destabilize broader emerging market debt markets. For example, Ukraine's debt restructuring in 2015 and Egypt's recent bond issuance challenges illustrate how liquidity constraints can ripple across asset classes.

Mitigating the Risks

Investors must adopt a nuanced approach to emerging market debt in EBRD regions. Diversification across sectors and geographies, coupled with hedging against currency and interest rate volatility, is essential. Additionally, monitoring country-specific metrics—such as debt-to-GDP ratios, external financing needs, and fiscal reserves—can help identify early warning signs of distress.

The EBRD's focus on sustainable infrastructure and SMEs offers a potential counterbalance. By channeling capital into projects with stable cash flows, the bank may help mitigate some debt risks. However, this requires careful due diligence to ensure alignment with broader fiscal strategies.

Conclusion

The debt vulnerabilities in EBRD member states reflect a broader global trend of overleveraged economies struggling to adapt to higher interest rates and geopolitical turbulence. While the EBRD's developmental role remains vital, investors cannot ignore the growing risks to portfolio resilience. As the IMF and World Bank emphasize, debt transparency and reform are urgent priorities. For now, emerging market debt in EBRD regions demands cautious optimism—and a readiness to recalibrate strategies in response to unfolding crises.