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Eastern EU Nations Face Increased Borrowing Costs Amid Russia-Ukraine Conflict

Russia's invasion of Ukraine hikes borrowing costs for EU's eastern members, amidst housing market concerns in Poland.

By Mackenzie Crow

5/15, 01:44 EDT

Key Takeaway

  • Russia's invasion of Ukraine has increased sovereign borrowing costs for EU's eastern members by half a percentage point, with debt spreads over Germany remaining high.
  • EU membership significantly boosted the living standards of its eastern nations, doubling their GDP per capita relative to Germany since 2003.
  • Poland debates a controversial housing market stimulus that could exacerbate affordability issues, amid political and inflationary pressures delaying interest rate cuts.

Sovereign Borrowing Costs Rise

The European Bank for Reconstruction and Development (EBRD) has reported an increase in sovereign borrowing costs for the EU's 10 eastern members due to Russia's invasion of Ukraine. The cost has risen by approximately half a percentage point since the onset of the war. Beata Javorcik, the EBRD’s chief economist, highlighted the market's reaction to the geopolitical tensions, noting that the debt spread with Germany's five-year bonds for these countries has remained above 100 percentage points. This analysis encompasses nations such as Poland, Hungary, Croatia, and Latvia. The median yield on 5-year government bonds in the EBRD regions has seen a three percentage point increase from early February 2022 to mid-April 2024.

EU Membership and Economic Growth

Despite the increased borrowing costs, EU membership has significantly boosted the living standards of the eastern members. For the eight nations that joined the EU in 2004, their economies now correspond to, on average, 50% of Germany's per capita GDP, up from 26% in 2003. According to the EBRD report, about half of this growth can be attributed to joining the EU, underscoring the success of EU accession for these countries.

Housing Market Stimulus in Poland

Poland is reevaluating its plan to introduce a housing market stimulus amid concerns that it could exacerbate affordability issues in an already booming market. The proposed 21.5 billion zloty stimulus, aimed at reducing mortgage rates potentially to zero percent, has sparked debate and protests, particularly among young Poles. Critics fear that the stimulus could lead to a further increase in property prices, making housing even less accessible. The average price of a 70-square meter flat in Warsaw has significantly increased over the past five years, highlighting the long-standing issue of housing affordability in Poland.

Political and Market Dynamics

The stimulus plan, which emerged from political competition during the last election campaign, is still pending approval from the cabinet and parliament. Real estate experts warn that the plan could lead to additional demand, particularly from cash-rich investors, potentially causing a rush in the housing market. This concern is supported by the experience of a previous subsidy program, which led to a spike in mortgage demand and a significant increase in property prices. The government's evolving stance on the stimulus, coupled with political uncertainties, has introduced volatility into the market. Additionally, Poland's Monetary Policy Council (MPC) has delayed anticipated interest rate cuts until early 2025 due to inflation concerns, further impacting market expectations.

Street Views

  • Beata Javorcik, EBRD (Neutral on EU's eastern members):

    "You see the impact of the war on central Europe. Many governments are openly talking about their fear of being attacked and that certainly is a signal that is received by the markets."