Balkan Democracies Fray as Anti-Austerity Boosts Radicals

Austerity is starting to tug at the seams of Europe’s youngest democracies.

Romanian Prime Minister Victor Ponta’s drive to oust the president, whose budget cuts drew praise from German Chancellor Angela Merkel, will come to a head in a July 29 referendum. Incoming Serbian Premier Ivica Dacic threatened to sack the central bank chief and declared foreign banks an “enemy.” The leu and the dinar fell to record lows against the euro as debt costs soared.

Politicians in the region are riding anti-austerity sentiment that has also bolstered radicals in more established European democracies such as Greece, France and the Netherlands. The post-communist leaders are following Hungarian Prime Minister Viktor Orban, who has battled the EU for two years as he sought to consolidate his power, said Lars Christensen, chief analyst at Danske Bank A/S. (DANSKE)

“The politics and the rhetoric of the Hungarian government and what we now see in southeastern Europe -- it’s the same sentiment,” Christensen said. Many Balkan countries “are moving in the wrong direction at the same moment as Hungary. They have all kinds of attempts to rig the process. Democratic institutions are not really respected.”

Investor Worries

The Romanian leu and the Serbian dinar have been the world’s second and third worst-performing currencies against the euro in the past month after the Sudanese pound. The leu has dropped 3.5 percent, touching a record-low 4.6509 per euro on July 24. It traded at 4.6075 at 4:06 p.m. in Bucharest. The dinar declined 2.4 percent in the past month to a record-low 119.6020 against the euro yesterday and was at 117.9933 at 3:07 p.m. in Belgrade.

Yields on Serbia’s benchmark 10-year foreign bond maturing in 2021 have risen 60 basis points in the past three months to 7.09 percent today. The yield on Romania’s 2022 Eurobonds have risen 19 basis points to 6.18 percent over the same period.

Romania and Serbia, which are among countries in eastern Europe where political risk pushes up borrowing costs and weakens currencies, also have “steep external financial challenges,” Mai Doan and Raffaella Tenconi, London-based economists at Bank of America Merrill Lynch, said July 20 in a research note.

“The volatile risk environment, together with financing pressures and political uncertainty in these countries, will most likely lead to further pressures” on government bonds in the months ahead, Doan said by e-mail yesterday.

Deteriorating Democracies

The quality of democracy has deteriorated in several countries in central and southeastern Europe, with “massive infringements on participation rights and rule of law,” Bertelsmann Stiftung, Germany’s largest private non-profit foundation, said in a May presentation of its Transformation Index on its website.

Serbia and Hungary rank second and third from the bottom in eastern Europe, according to the index, which gauges the quality of democracy, a market economy and political management in 128 developing and transition countries. Ukraine has the region’s worst score and Romania is fifth last, according to this year’s figures published in March.

Government moves in Hungary and Romania “suggest to me that this is still a generation that doesn’t have democratic instincts in their blood,” Tomas Valasek, director of foreign policy and defense at the Centre for European Reform in London, said July 18 by phone. “It takes more for the generational change to cycle some of the old politicians out of the system.”

Southeastern Europe’s politicians are riding a wave of a Europe-wide backlash against austerity that started in the west.

The crisis in the euro region and the damage it may wreak on Europe’s political landscape “hasn’t been sufficiently emphasized,” Nobel laureate Paul Krugman said in a July 25 New York Times blog post.

‘Fail Disastrously’

If the policies of austerity pursued by major parties across the political divide “fail disastrously, which is getting close to a certainty, the effect is to discredit the entire political center, leaving radicals right and left as the only people who aren’t tainted,” he wrote in the post.

A clash in Romania between Ponta’s ruling coalition and Basescu triggered a series of legal changes and decisions in Parliament leading to a suspension of the president for one month so that people can cast their ballot on whether he can retain his job.

Efforts to ease impeachment rules and diminish the powers of the Constitutional Court drew criticism from European Union leaders including European Commission President Jose Barroso and Merkel, who voiced concern that democracy is backsliding in the former communist country.

‘Narrow Observation’

“I’m still very much worried about the state of democracy in Romania,” EU Justice Commissioner Viviane Reding told reporters July 25 in Brussels. “The situation will be under very narrow observation.”

Basescu stands a chance to win reinstatement if less than the required 9.1 million voters, or half the electorate, turn out, voiding the referendum. The opposition has urged a boycott of the vote. If the threshold is met, about 72 percent of voters would impeach Basescu, according to a July 23-25 survey by polling company Operations Research for private television Realitatea TV. The poll of 1,150 people had a margin of error of 2.9 percentage points.

“As Ponta focuses on power struggle, it is economic policy that is suffering,” Otilia Simkova, an analyst at Eurasia Group in London, said by phone.

Dacic was sworn in today after three months of political wrangling while the dinar hit a record low and borrowing costs rose in a country where one in four is out of work.

Milosevic’s Party

His Socialists are back in power for the first time since the ousting of the party’s founder, Slobodan Milosevic, who is blamed for fomenting the 1990s Balkan civil wars that destroyed the economy.

A former wartime spokesman for Milosevic, Dacic has derided foreign banks and is attempting to force out central bank Governor Dejan Soskic, blaming him for the rise in bad debt at several banks in which the state has a stake.

The currency’s weakness and an expanding bad-loan portfolio could require at least seven banks to boost capital to meet requirements, the central bank said on July 16 in its Financial Stability Report. Soskic vowed July 16 not to resign.

The Cabinet pledged to resume talks with the International Monetary Fund and the World Bank and faster integration with the European Union. The IMF suspended a $1.3 billion precautionary- loan program in February amid evidence the previous administration was slipping on budget and debt targets.

“People in a difficult personal situation are looking for a savior, a strong leader, anyone who tells them with confidence that he is going to end austerity, tax the banks, the rich, everybody with suspiciously high profits and put money into voter’s pockets,” said Eurasia’s Simkova. “The problem is that, looking for a strong leader, voters are likely to get an autocrat.”

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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