Digging into the composition of government debt in CESEE: a risk evaluation

This paper reviews the composition of government debt in Central, Eastern and Southeastern Europe (CESEE) with a particular focus on the related risk implications, using a unique dataset compiled from various sources. The comparatively strong increase in government debt Levels recorded in CESEE since the global financial crisis (GFC), together with an increased role of foreign portfolio investors with a typically short-term orientation, has accentuated refinancing risks. Nevertheless, on the aggregate level, refinancing and interest rate risks have been reduced in CESEE as governments increasingly have been able to issue longer-term debt instruments. At the same time, however, risks are not distributed equally across CESEE: there are still a few countries that record sizeable short-term debt (partially denominated in foreign currency) and/or are likely to face pronounced repayment spikes in the period up to 2025. The combination of an increased debt stock and a dominant share of foreign currency-denominated government debt also implies substantial exposure to exchange rate risks in a few CESEE countries. Historical default episodes underline the riskiness of the large shares of foreign currency-denominated government debt that are often observed for countries with less developed capital markets. The issuance of debt instruments which are exposed to high refinancing and rollover risk is only partially driven by debt management strategies; it is also a direct consequence of domestic financial market conditions. Therefore, special emphasis should be placed on fostering CESEE capital markets to strengthen government borrowing at home and in the local currencies and to further develop derivative products to hedge interest and exchange rate risk.