In Central Europe,5-yeargovernment bond yieldshave broadly toned down since the lastpeak observed in 2022, amidst acute geopolitical uncertainties.
The relief on bondmarkets is rathergood newsfor Central European countries which have experienced a surge in their debt servicing costs over the pastyear. In2023, theratio ofinterest payments as a percentage of GDPwas highestfor Hungary,amongst European Union countries.
In the short term, the decline in bond yields could however slow down and they will likely remain at a higher level compared to the pre-Covid-19 period. This situation can be explained by a prudent monetary policy in the region.
Another explanation is that most countries in the region have posted high fiscal deficits as a result of multiple shocks faced by their economies since 2020. This year, those deficits will likely exceed the 3% of GDP target under the Stability and Growth Pact, which was reintroduced since January 2024. Besides, several countries, including Poland, Hungary and Slovakia, may be subject to an excessive deficit procedure. Romania has already been under this status since 2020 and this will not change this year.
The interest burden should barely ease in the short term. Meanwhile, the yield differential remains largely in favour of Central European countries when comparing with Germany. This will attract portfolio investment flows and ease the funding of trade deficits but at the cost of an increase in external vulnerability, all other things being equal.
