Romanian Bond Yields Fall as IMF Plan Outlives Government

Investors are betting Romania’s new government will stick to its bailout program in the face of elections this fall after anti-austerity protests and low voter support chased former Prime Minister Emil Boc from office.

The European Union’s second-poorest member sold a record amount of debt in the first two months and more than planned for the quarter as it reaps the benefits of an economic policy path under International Monetary Fund oversight, while neighbors such as Hungary and Ukraine struggle to access IMF funds. Romania raised double the amount planned at an auction today, selling 1 billion lei ($298 million) of five-year bonds to take advantage of tumbling yields.

“From a fixed-income perspective Romania is doing most of the right things,” Blaise Antin, who helps manage $5 billion in emerging-market debt at TCW Group Inc. in Los Angeles, said in a March 13 interview. “It looks to me like Romania will outperform in macro terms and probably also on the policy side. The fact that they have an IMF program in place gives an anchor to the policy side.”

Romania relied on a 20 billion-euro ($26.1 billion) loan from the IMF and the EU from 2009 to 2011 to emerge from the deepest recession on record. The government, which has cut state wages and raised taxes to narrow the budget deficit to 1.9 percent of economic output this year from 4.35 percent in 2011, secured a new 5 billion-euro precautionary accord to reassure investors before elections this year.

‘Mediocre Student’

Romania reversed its image as a “mediocre student” on economic policy after the government last year weathered no-confidence votes and protests to adhere to its IMF agreement, Jeffrey Franks, the fund’s mission chief in Bucharest, said last month. The IMF expects any new government to honor the terms of the current lending accord and keep the fiscal terms laid out.

Romania has sold 23.83 billion lei ($7.1 billion) in Treasury bonds and bills on the domestic market and $2.25 billion in dollar bonds to international investors this year, the most since records began in 2005, according to central bank data. The average yield fell to 6.29 percent at today’s auction from 6.75 percent at the similar auction on Feb. 16.

The premium investors demand to buy five-year Romanian debt rather than Germany’s has narrowed 125 basis points this year to 3.98 percentage points. A basis point is 0.01 percentage point. Hungary’s spread on similar-maturity debt relative to Germany has narrowed 110 basis points to 7.65 percentage points. The Germany-Poland five-year yield gap is 4.1 percentage points from 4.57 points at end-2011.

Search for Funds

Hungary has been seeking since November to start talks with the IMF about financing assistance as the government clashes with the EU and the Washington-based lender on issues ranging from central-bank independence to a judicial overhaul. Ukraine’s bailout has been frozen for a year because the government won’t approve raising consumer-energy costs.

Romania’s credit-default swaps are among the world’s 16 best performers this year. The cost of insuring against a default by Romania has declined about 150 basis points this year to 301 basis points today, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The CDS are 214 basis points narrower than Hungary’s and 138 basis points wider than those of Poland, the EU’s largest EU member.

“They have done the job over the last year and the IMF is very happy at the moment,” Guillaume Tresca, an emerging market strategist at Credit Agricole in Paris, said March 13. “They are implementing strong fiscal measures to meet budget deficit and fiscal targets.” Credit Agricole recommends investors buy Romania’s one-year Treasury bills foreign-currency hedged as the Balkan country improves its fiscal balance and the central bank has room to cut interest rates.

Violent Protests

That job was threatened at the start of the year when accusations of corruption and two years of tax increases and government spending cuts, including a 25 percent reduction in public-sector wages, prompted violent protests that left 60 people injured.

The demonstrations and low voter support pushed Boc from power, one of eight European Union leaders to leave office as Europe’s debt crisis roils financial markets and takes a political toll on governments reducing spending during an economic downturn.

It also hit the Romanian leu, the worst-performer so far this year among the EU’s eastern member’s currencies. The leu has lost 1.3 percent to the euro in 2012, trading at 4.3830 as of 4:49 p.m. in Bucharest.

Bottom Line

“The bottom line for Romania is that it’s still enjoying the support of the IMF and the EU in the form of a precautionary stand-by arrangement and that’s supporting the relatively low risk premium when you compare it with Hungary,” Michal Dybula, an emerging-markets economist at BNP Paribas in Warsaw, said in a Feb. 22 interview, adding rising wages may fuel import demand and lead to external imbalances.

Mihai-Razvan Ungureanu took over as premier last month and the 43-year-old former spy chief has turned to a new generation of politicians to resuscitate the government’s fortunes. He made Bogdan Dragoi, 31, finance minister and Lucian Bode, 38, to guide the economy as the debt crisis damps demand for the Balkan nation’s exports and limits credit flows.

The ruling coalition has pledged to keep to the IMF agreement as well as support economic growth, while President Traian Basescu on March 7 said public-sector wages should be reinstated to pre-crisis levels before voters head to the polls.

Romania’s economy will probably grow 1.6 percent this year, the European Commission forecast on Feb. 21. Polish growth will be 2.5 percent, the EU’s fastest, and the Czech Republic will stagnate, the commission said.

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