Romanian Turmoil Hurting Outlook for Leu, Boosting Debt Costs

The political battle between Premier Victor Ponta and suspended President Traian Basescu will boost Romania’s funding costs and further weaken the leu, the world’s second-worst performing currency this month, economists and investors from London to Bucharest said.

The unrest triggered by a spat between Ponta and Basescu has raised investor concerns about the country’s commitment to fiscal discipline next year under an international bailout. The European Union summoned the premier to Brussels to discuss the row, while German Chancellor Angela Merkel, who has lauded the president for his support of austerity measures, warned Ponta of violating the bloc’s basic principles of democracy.

“We actually somewhat reduced our positioning in Romania due to this last week and we’re still in the process of considering further action,” Ronald Schneider, who helps manage about $1 billion in emerging-market debt at Raiffeisen Kapitalanlage GmbH in Vienna, said by phone. “The key is to end the uncertainty and whether to believe that the willingness of the government to cooperate with the International Monetary Fund is there.”

Decisive Blow

Ponta is looking for the decisive blow against Basescu two months after becoming the third premier this year in the country that will hold general elections in 2012. The dispute comes after the sovereign-debt crisis in Europe, Romania’s main trading party, and a cold snap pushed the economy into a second recession in four years.

The political turmoil weakened the leu to a record low against the euro on July 9. The currency has dropped 1.6 percent against the euro this month, the world’s second-worst performance behind the Sudanese pound. It sank to a record-low 4.5472 against Europe’s common currency on July 9 and traded at 4.5240 at 1:48 p.m. in Bucharest today, data compiled by Bloomberg show.

The cost of insuring against a Romanian default for five years using credit-default swaps rose to 441 basis points, close to a month-high of 448 basis points on July 9, from 407 basis points on July 5, data compiled by Bloomberg show.

Lawmakers suspended Basescu last week, accusing him of overstepping his duties when announcing state wage cuts in 2010 and other economic decisions. Basescu, who survived an impeachment referendum in 2007 with the backing of 74 percent, has seen his popularity plunge after supporting austerity measures of the previous government headed by Emil Boc.

Policy Uncertainty

“Policy uncertainty and the risk of the IMF program stalling will likely lead to steep challenges in foreign-exchange funding prospects, exacerbating the downward pressures on the leu and Romanian credit,” Bank of America Merrill Lynch economist Mai Doan said in a note to clients this week.

The ruling coalition “has shown strong verbal commitment to the IMF program, but it has not revealed any details about its longer term economic strategy and fiscal discipline has yet to be tested,” Doan said.

The power struggle prompted Merkel to back Basescu against efforts by the ruling coalition to impeach him. Ponta said July 9 that Merkel and her party support Basescu “because they are the only supporters of austerity in Europe.”

Borrowing Costs

Romania’s domestic borrowing costs rose “slightly” in the past few weeks pushed up by the debt crisis and political tensions in the country, Ziarul Financiar reported on July 10, citing Deputy Finance Minister Cristian Sporis. The ministry sold 11-month Treasury bills on July 9 at an average yield of 5.53 percent, compared with an average yield of 5.29 percent for one-year bills sold last month.

“The key for markets should be fiscal policies and structural reforms that were undertaken over the past three years. Policies are unlikely to be changed this year, however, it’s next year we are worried about,” Nomura’s Peter Attard Montalto also said. “In particular we are concerned about the loosening of policy in the 2013 budget,” which “will be published before the November election and likely influence Ponta’s chances of” winning elections scheduled for November or December.

Romania’s central bank “may be less keen” to defend the leu, which has a managed floating system, due to large IMF repayments and the more difficult external refinancing prospects brought about by the political uncertainty, according to the Bofa Merrill economist.

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