Fiscal policy may deter holding Romanian debt

Subject

The outlook for Central-East European debt.

Significance

A flurry of hawkish commentary from the world’s leading central banks, in particular the ECB, which is preparing the ground for a withdrawal of monetary stimulus, has put significant strain on the domestic bond markets of Central-Eastern Europe (CEE). Under particular pressure are Romanian domestic bonds, because of the threat of fiscal slippages under the new Social Democrat (PSD)-led government, which are likely to force the National Bank of Romania (NBR) to hike interest rates more aggressively than its regional peers.

Impacts

• Despite the central-bank-driven sell-off in global markets, negative-yielding bonds still account for one-fifth of global sovereign debt.
• Persistent concerns about a supply glut are keeping Brent crude below 50 dollars per barrel, with oil prices down by 14% since end-May.
• Emerging Market stocks are declining under pressure of hawkish rhetoric from central banks, but not Hungarian and Czech equities.