As an environment of global deflation persists, money looking for yield continues to flow into emerging-market bond funds. Funds that have never invested in central and eastern European debt are now queuing up to do so. One banker in Poland says even Australian investors now hold Polish debt.
This is great news for the debt agencies in convergence countries. As Edward Basinski, head of foreign debt at the Polish ministry of finance, likes to say: "We have now effectively converged." Spreads on Polish, Hungarian and other convergence debt are very low. At 47 basis points over swaps for Poland, and 27bp over swaps for Hungary, they are in line with spread levels for debt issued by Italy or Greece immediately before they converged.
Partly as a result of these very low spread levels, and partly as a result of falling foreign direct investment levels, some CEE economies are relying more and more on these portfolio inflows to finance government. The best example is Hungary.
The current account deficit in Hungary, which throughout the late 1990s stayed small, suddenly worsened in the second half of 2002, from e2 billion in 2001 to e2.8 billion in 2002.