Who pays more and at what cost? Financing models in CEE

While Hungary and Romania face higher yields and interest burdens, countries such as Czechia, Slovakia and Poland benefit from stronger institutional frameworks and financing structures. Long-term sustainability depends on the chosen financing model rather than short-term cost comparisons.

When examining the interest rates paid on government bonds in Central and Eastern Europe, as well as the interest expenditures borne by national budgets, substantial cross-country differences become apparent. This analysis seeks to identify the underlying causes of these divergences, with particular attention to economic structures and policy choices that shape sovereign borrowing costs.

We compare 10-year government bond yields with fiscal deficits and public debt levels in 2025 across the Visegrád countries and Romania to understand divergences, on the assumption that these variables play a decisive role in determining long-term interest rates. The 10-year maturity is used as the primary benchmark because it represents the longest liquid and internationally comparable tenor that simultaneously reflects medium-term economic, fiscal and institutional risks.

Table 1: Public debt, budget deficit and 10-year yield in 2025

Sources: Eurostat, European Commission, European Central Bank Data Portal

Beyond debt and deficits

These factors alone, however, do not fully explain the observed differences. Countries with exceptionally high public debt ratios, such as Greece and Italy, or with exceptionally high budget deficit like Poland, currently borrow at substantially lower interest rates than Romania or Hungary.

For Greece and Italy, euro-area membership provides a significant “confidence premium”. In addition, sovereign risk assessments by major credit rating agencies explicitly incorporate monetary policy credibility and long-term inflation expectations, both of which materially influence market pricing and borrowing costs.

Table 2: Standard & Poor’s sovereign ratings as of late 2025 / early 2026

Source: S&P Global Ratings, sovereign rating reports

Hungary and Romania are both currently rated BBB- / A-3 by Standard & Poor’s. While Hungary’s outlook is stable and its sovereign debt remains investment-grade, Romania’s outlook was revised to negative in 2024. In Hungary’s case, S&P assesses fiscal consolidation prospects, disinflation — despite the high-inflation episodes of recent years — and the economic recovery as broadly stable. At the same time, the public-debt ratio and elevated interest expenditures are identified as key risk factors. In Romania, S&P highlights concerns regarding the sustainability of fiscal deficits, persistent structural imbalances and weaker medium-term growth prospects, which together underpin the negative outlook.

Czechia, Slovakia and Poland sit firmly in the "A" category

By contrast, the credit ratings of Czechia, Slovakia and Poland are firmly within the “A” category, all with stable outlooks. Czechia, in particular, is positioned in the upper-medium credit tier in Europe, reflecting a level of fiscal credibility and institutional strength that is closer to Western European standards than to BBB-rated peers. Although Czechia also experienced inflationary pressures in recent years, the central bank’s response was rapid and orthodox, reinforcing policy credibility.

Slovakia’s sovereign assessment is further supported by its euro-area membership, which contributes to stronger external balances and more manageable debt-servicing costs. Poland’s rating, while only one notch above that of Hungary and Romania, remains stable and points to a comparatively favourable financial position within the region.

Exceptionally high debt-servicing costs in Hungary

An equally important dimension is the extent to which interest payments burden national budgets. From this perspective, Hungary stands out in a way that is not immediately apparent from yield levels alone. Hungarian interest expenditures typically amount to 3–4% of GDP, and in 2024 they reached approximately 5% of GDP, the highest ratio in the European Union that year. This figure significantly exceeded the second-highest value, recorded in Iceland (around 4%), as well as Italy’s roughly 3.9%. By comparison, the lowest interest burdens were observed in Luxembourg (0.3%), Bulgaria (0.5%) and Sweden (0.6%).

Over a longer horizon, between 2015 and 2024, Hungary devoted on average close to 3% of GDP annually to interest payments. During the same period, higher averages were recorded only in a small number of countries, including Iceland, Italy and Greece.

Table 3: Interest rate expenditures in 2024

Source: Portfolio

Debt structure as a key explanatory factor

To understand these differences, it is essential to examine the structure of public debt.

Table 4: National debt in domestic and foreign currencies

Source: European Commission

Hungary's domestic interest premium

The Hungarian state pays a significantly higher interest premium on forint-denominated bonds—accounting for roughly 70% of public debt—issued to domestic investors than on its foreign-currency-denominated debt. The historical peak occurred in 2022, when the 10-year forint yield reached approximately 10.25%. Although yields moderated in subsequent years, they remained in the 6.5–7.1% range, still above international benchmark levels.

This policy choice emerged during and after the Covid-19 shock, when external financing conditions were uncertain and global interest rates were elevated. By prioritising domestic financing, policymakers sought to ensure budgetary stability while limiting foreign-exchange and market risks. At the same time, higher interest payments were intended to raise household liquidity and thereby provide an implicit fiscal stimulus.

Forint-based financing does not unwind quickly, but it continues to weigh on the budget for years. A further drawback is that household savings are diverted into government bonds, potentially crowding out equity markets and long-term growth-enhancing investment. More extreme manifestations of this dynamic can be observed in countries such as Brazil and Argentina, where excessive reliance on domestic savings for public financing has undermined investment and growth.

Accordingly, Hungary’s approach can be considered rational in the short term as a crisis management technique, however, over the long run it is sustainable only if the country gradually returns to a market-based, institutionally anchored financing framework.

The Czech way

The analysis also shows that Czechia relies heavily — even more heavily than Hungary — on domestic financing. The crucial difference, however, is that Czech koruna-denominated 10-year bond yields closely track international benchmarks, meaning that the Czech state does not pay an interest premium to its own citizens.

This reflects the presence of a strong domestic institutional investor base in Czechia — and, to a lesser extent, in Poland — built up over several decades. Namely, pension funds and insurance companies are the primary buyers of government bonds, typically seeking long-term, low-risk assets. As a result, the Czech government does not need to attract households through elevated yields.

Czechia represents the most mature institutional model in the region, while Poland broadly follows a similar market-based, institutionally anchored financing framework, albeit with somewhat greater fiscal volatility and political intervention risk.

In Hungary, by contrast, the institutional investor base is narrower, and households have become the principal source of domestic financing. In Romania, a similarly limited institutional base has resulted in continued reliance on foreign-currency borrowing, also at relatively high interest rates.

Ultimately, the question is not who pays more today, but which financing model is sustainable in the long term — and at what cost.