Which countries will start using the euro in 2026?

Bulgaria will adopt the euro and replace the lev on January 1, 2026, becoming the eurozone's 21st member; the country (population ~6.7 million) has been an EU member since 2007 and joined Schengen in March 2024. The move follows EU accession rules (including ERM II) and Denmark’s longstanding opt-out remains unique; euro adoption should reduce FX volatility and deepen monetary integration for Bulgaria, with limited immediate impact on broader markets but potential implications for Bulgarian sovereign risk premia and regional trade dynamics.

Analysis

Market structure: Bulgaria’s switch to the euro on 1 Jan 2026 is a de-risking event for sovereign credit and banking funding: expect euro-denominated issuance to rise and 5y Bulgarian sovereign spreads vs. German bunds to compress an estimated 50–120 bps within 6–12 months as ECB credibility replaces FX-risk premium. Direct beneficiaries are Bulgarian banks, large corporates able to tap EUR markets, and eurozone payment/settlement providers; losers are FX carry and local-currency hedgers who currently earn a premium for lev exposure (lev is already pegged at 1.95583 BGN/EUR so FX market impact should be limited). Cross-asset: modest spread compression should lift Bulgarian EUR bond prices, tighten CDS, and have negligible impact on commodities; options on Bulgarian names may see implied vol retreat.

Risk assessment: tail risks include operational/IT failures at conversion (ATM/retail cash issues) triggering temporary runs, legal disputes over contracts not redenominated, or a political shock that re-opens sovereign risk—each could widen spreads >200 bps intraday. Time horizons: immediate (conversion week) operational volatility; short-term (3–12 months) credit spread compression and one-off price rounding effects (inflation tick +0.3–1.0% possible); long-term (2+ years) monetary policy pass-through and fiscal constraints under ECB regime. Hidden dependencies: continued ECB support for peripheral liquidity, EU disbursement timing of cohesion funds, and local bank asset-quality that may mask NPL cyclicality.

Trade implications: direct plays — (1) allocate a tactical 1–2% portfolio position to Bulgarian 5–7y EUR sovereigns if spread >120 bps over Germany (take profit when spread compresses 50–100 bps or by 12 months); (2) buy 1–2% long exposure to Raiffeisen Bank International (RBI.VI) which has Bulgarian retail presence, target +25% in 12 months, stop-loss -12%. Pair trade: long RBI.VI vs short PKO Bank Polski (PKO.WA) 1% to play euro-conversion beneficiary vs non-euro CEE rate risk. Options: use a 12-month call spread on RBI (buy 0–20% OTM call, sell 40% OTM) to cap premium and target 2–4x upside if conversion narrative accelerates.

Contrarian angles: consensus assumes a smooth, non-inflationary conversion; that underestimates one-off price rounding and short-term consumer inflation of 0.3–1.0% which could pressure Bulgarian real wages and consumption in H1 2026. Market may underprice operational/timing risk—buy protective puts or size positions small (1–2%) until 3 months post-conversion; historical parallels (e.g., euro entries in Baltics) show initial spread compression then occasional reversals if broader ECB tightening or political shocks occur, so cap duration exposure and prefer credit over equity for first 12 months.

Key Decisions for Investors

• Establish a tactical 1–2% portfolio allocation to Bulgarian EUR sovereign 5–7y bonds only if spread >120 bps vs. Germany; trim/exit when spread narrows by 50–100 bps or after 12 months.
• Initiate a 1–2% long position in Raiffeisen Bank International (RBI.VI) with a 12-month price target +25% and a hard stop-loss at -12%; hedge with a 12-month call spread (buy 0–20% OTM, sell 40% OTM) to limit premium.
• Implement a 1% pair trade: long RBI.VI vs short PKO Bank Polski (PKO.WA) to capture relative benefit of euro adoption vs. non-euro CEE rate exposure; reevaluate after 3 months post-adoption.
• Buy 3–6 month protection (puts) sized at 0.5–1% notional on Bulgarian credit exposure around the conversion week to guard against operational tail risk and >200 bp spread widening.
• Avoid large-duration bets in Bulgarian local-currency assets until 3–6 months post-conversion; instead favor short-dated EUR paper and bank Tier 1 equity exposure with capped downside via options.