Citi: Formation of a new government remains a challenging task

“We believe that long delays in forming a new government or snap elections constitute an important risk. Concerning the latter, we think that the probability of early general elections is rather low, given the absence of strong incentives among the major political parties to go for snap elections. Whether or not the PSD and PNL can stick together against the PDL will play a crucial role in shaping political developments in the near term”, Citi analysts said.

On the other hand, Citi analysts will stick to the base scenario built on the assumption that of a more stable political environment by early next year.

“In our view, returning to normalcy on the political front is a prerequisite for credible implementation of the EU-IMF supported economic program, which will, in turn, promote fiscal discipline and facilitate the adoption of the required structural reforms”, Citi outlined.

But irrespective of the composition of the new government, Citi continued, “investors will monitor closely whether or not political developments lead to unacceptable delays in carrying out reform measures in the fiscal sphere”.

“As the budget deficit is heading towards 8.0% of GDP, the markets’ tolerance of fiscal slippages or a stalling of the IMF-EU supported program is likely to be limited. In our view, there is probably broad agreement among the main parties about the 2010 budget and other measures included in the program”, Citi pointed out.

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