Investors Sleepwalk Into Balkans as ECB Eclipses Bond Risk

Updated on
  • Stimulus masks fallout from politics in Macedonia, Croatia
  • Raiffeisen puts hold rating under review for nations’ bonds

Investors wouldn’t know it from looking at the bonds, but political risk in the Balkans is on the rise.

Yields on Macedonia’s euro-denominated debt are near record lows even after protesters stormed the nation’s parliament. The cost to insure Croatia’s debt is at an eight-year low as government officials argue over the bankruptcy of the country’s biggest company. That’s sufficient tension for strategists at Raiffeisen Bank, one of the region’s largest lenders, to put their hold rating on the nations’ bonds under review.

Analysts blame the European Central Bank’s stimulus program for driving up demand for riskier assets and distorting the Balkan debt market. While that’s good news for borrowers, some investors are unwittingly being exposed to the risk of significant losses should tensions flare up in an area that was engulfed in war less than two decades ago, analysts at Legal & General and Raiffeisen Bank say.

“The stimulus from the ECB is countering any risks that come up from that region,” said Simon Quijano-Evans, an emerging-market strategist at Legal & General in London. “If I look back to the 1990s, the Balkans really took everyone by surprise. A cautious approach is definitely merited.”


  • Protesters and opposition leaders stormed Macedonia’s parliament after Prime Minister Nikola Gruevski failed to recognize the election of a parliamentary speaker by the opposition Social Democrats and parties representing ethnic Albanians. The protest deepened a months-long deadlock over who will run the cabinet and whether the country should continue on a path toward European Union and North Atlantic Treaty Organization membership
  • The violence in parliament “threatens the overall political stability and raises concerns over the possibility of ethnic clashes in the country,” Gintaras Shlizhyus, a strategist at Raiffeisen wrote in a note to clients


  • A governing alliance broke up last month amid a dispute over the handling of a bankruptcy at Agrokor d.d., less than a year after another government was toppled in the Adriatic nation over a conflict-of-interest case. The company’s insolvency threatens the country’s largest employer with revenues amounting to 15 percent of gross domestic product

Elsewhere in the region, the government of Kosovo was toppled in a no-confidence vote over a border demarcation deal with neighboring Montenegro on Wednesday. The nation has been plagued by political crises ever since it declared independence from Serbia in 2008. Its domestic euro-denominated bonds due in 2022 were little changed on Thursday.

Still, Lutz Roehmeyer, who manages about 2.1 billion euros ($2.3 billion) of investments at Landesbank Berlin Investment GmbH, including bonds in the Balkans, is betting the recent events won’t escalate.

“The break up of the government in Croatia does not change much in terms of commitment to pay the bonds,” Roehmeyer said. “In the end politics have short legs and fundamentals are what matters.”

Investors’ Radar

But political risks will start to come back onto investors’ radars when the ECB starts winding down its stimulus, according to Raiffeisen’s Shlizhyus. Officials at the central bank, which has injected more than 1.52 trillion euros into the European bond market since 2015, have started to publicly debate a timeline for winding down the stimulus as inflation approaches a nominal target of just under 2 percent.

Croatia’s euro bonds due 2025 yield 2.73 percent, less than the 2.83 percent rate on Turkish bonds due 2023 and 3.25 percent on South African 2026 notes that both carry a higher credit score at Moody’s Investors Service and Fitch Ratings. Macedonia’s 2023 euro-denominated debt has a 4.59 percent yield, near a record-low 4.28 percent reached last year. 

“Countries in the Balkans will have much more volatility,” Shlizhyus said by phone. “The current calmness shows some level of complacency.”

(Updates bond yields in 12th paragraph.)
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