Ukraine risk will hurt investor perceptions of Poland

Significance

Moscow’s biggest counterattack against European sanctions in response to its invasion of Ukraine increases the strain on the creditworthiness of Central Europe’s largest economy, while the escalation in geopolitical tensions increases the risk premium on Polish assets. A spike in inflation leaves Poland with negative real rates at a time when economic fundamentals have deteriorated significantly.

Impacts

• The ruble is strengthening against the dollar due to Moscow’s imposition of capital controls in response to swingeing Western sanctions.
• Emerging market bond funds are suffering their worst performance since 2015 as global investors retreat from riskier assets.
• The dollar’s performance against a basket of major currencies is fuelling bets that the euro will fall to parity with the dollar.