A country without a Government. Leu under pressure

October 13 will be one of the most pivotal events in the modern history of Romania: the first Government in the post-communist era was brought down by a motion of censure that passed yesterday in the Parliament. The collapse of the government will place the local currency and stock market under extreme pressure, and 2010 budget seems to be the biggest risk of the Government’s demise.

The failure of the government puts pressure on exchange rates

The Tuesday’s no-confidence vote has led to the first demise of the government in the post-communist era, heightening pressures over the local currency. Exchange rates hovered yesterday near 4.3lei/euro, although traders interviewed by Wall-Street speculate the intervention of the central bank.

Yesterday’s events are expected to reflect in the future performance of the local currency. It remains to be seen whether the local currency is capable of withstanding pressures, or break through the 4.3lei/dollar psychological barrier defended by the National Bank of Romania.

For today, NBR posted an official exchange rate of 4.2897lei/euro, up slightly from the previous session. Analysts expect the local currency to devaluate further and don’t rule out the possibility of the leu to touch a new record low vs the single European currency.

On Tuesday, October 13, 2009, the former Government under leadership of PM Emil Boc lost a parliamentary vote of confidence, with 176 votes against and 254 for.

What IMF and rating agencies say?

International Monetary Fund still expects Romania to meet its commitments made by authorities under the stand-by agreement, regardless to what political party comes to power, said Tonny Lybek, IMF’s regional representative.

“We are running a financing program with Romania, instead of a certain government. We expect the country to meet its commitments regardless to who forms the Government”, said the regional representative of IMF for Romania and Bulgaria, when asked whether the collapse of the government puts the country at risk of missing targets under the agreement with the international institution.

However, this could determine rating agencies to downgrade Romania’s country ratings should the political instability build up to a point where the Executive is no longer capable of putting in place economic and fiscal consolidation programs, said Frank Gill, Standard&Poor’s analyst.

“If the current political situation escalates into a political blockage and Government is no longer capable of continuing the economic and fiscal consolidation programs or contain the growing public finance problems, rating agencies could act on the country’s ratings soon”, Frank Gill told NewsIn.

S&P and Fitch cut Romania’s ratings to “junk” status in fall last year, while Moody’s remained the sole service to keep it in the investment grade camp.

New reasons for stock market crash

The collapse of the government led by Emil Boc will most likely send shockwaves through the Bucharest Stock Exchange.

Specialists interviewed by Wall-Street said this would put the market in a stand-by mode as traders will be hesitant to commit more money to the market, which will translate into narrow liquidity and sideways trading.

“Anything is possible now”, said Adi Lupsan, deputy director at Intercapital Invest.

“Despite the political instability, we may see the stock market moving up, in the attempt to patch up the difference between the Romanian and foreign markets. But BSE has already factored the collapse of the government in the stock prices”, said Lupsan.

Before the motion of censure was brought before the Parliament, stock prices were moving sideways, as the liquidity was narrow.