Developments in sovereign bond issuance in the Central and Eastern European region after the Lehman collapse

This paper focuses on the impact of the financial and economic crisis of 2008–2009 on the issuance of sovereign debt in the Central and Eastern European region and other developing countries. As a result of the fiscal rescue packages, the financing requirement of both developed and emerging countries has increased significantly since 2007, giving rise to substantial changes in risk appetite as well as considerable shifts in demand for the securities of various issuers operating in the global bond markets. During the most severe period of the crisis, only countries with the best credit ratings were able to obtain substantial amounts of funds, while less developed or emerging economies had limited options. In particular, shrinking borrowing opportunities translated into rising yields, weak auction demand and hence unsuccessful auctions. While the market turmoil did not spare less developed euro area countries either; these developments had a particularly negative impact on the government securities markets in the Central and Eastern European region. Although improving risk appetite prompted a parallel rebound in emerging sovereign bond markets, heightened competition for the shrinking financing resources raised the cost of funds in higher-risk economies considerably. Our findings show that – besides developments in risk appetite – demand for the sovereign bonds of emerging countries was also influenced by the crowding-out effect generated by the increased issuance of government papers in developed markets.