October 1 ľ zero hour of political crisis

As voting gets underway in Romania’s presidential elections, the two parties that formed the government have set off a political crisis that led to the collapse of the coalition, members of the Social Democratic Party leaving the government after President Traian Basescu agreed to the removal of democrat Interior Minister from his post.

Romanian and foreign economists warn that the political instability could limit the government’s ability to bolster the supervisory framework on public finances. In the worst-case scenario, Romania will fail to meet conditions imposed by the International Monetary Fund under the stand-by arrangement, namely the reduction of budget gap, the political crisis putting the completion of IMF accord at risk.

Should the program agreed with the International Monetary Fund failed to complete due to the country’s failure to meet terms, rating agencies said there would be the possibility of downgrading Romania’s sovereign ratings.

The political crisis didn’t affect Romania’s image in the eyes of foreign investors only, but has also put the local currency on edge. The leu slumped yesterday 1.2% versus euro, to an official exchange rate of 4.2495lei/euro.

BCR: Political stability ľ crucial for the ambitious IMF-set targets

“The political stability is crucial for putting the ambitious fiscal and structural reforms agreed with IMF in place”, Banca Comerciala Romana said in a report compiled by Eugen Sinca.

The pressures between the two parties that formed the governing coalition don’t help the country in meeting the macro policy targets agreed with the international institutions, report suggested. These targets were difficult to meet anyway, with or without the political crisis.

Raiffeisen: Political tumult could have a negative impact over exchange rates and real economy

The political instability could limit the government’s ability to bolster the supervisory framework on public finances and would put the stand-by arrangement with IMF and European Commission at risk, Raiffeisen Bank said in a report.

Raiffeisen Bank’s senior economist Ionut Dumitru said recently that political tumult “could put the stand-by arrangement with International Monetary Fund and European Commission at risk, which would have a negative impact over the approach to risk in Romania, and subsequently over exchange rates and real economy”, and would damage the country’s recovery prospects.

He outlined two scenarios: In the first case, interim ministers will be appointed instead of those nominated by the Social-Democratic Party which would function for only 45 days before a new government comes to power after being passed by the Parliament, or in the second case, a new government could be formed now and approved by the legislative body.

“It is unlikely for a new coalition to be formed, as this would mean long-range political instability. Let us remember that presidential elections are scheduled for November 22, 2009”, the economist stressed.


Moodyĺs: IMF has shown a remarkable tolerance towards Romania

Political tumult was foreseeable in view of the presidential elections, but without having any major impact on the country’s ratings for the short term, but on a medium to long term it could cause problems, according to Moody’s analyst Kenneth Orchard.

“We would be much worried if this would last 6 to 12 months and would hamper the structural reforms. We don’t think it would last so long. Things would probably temper down by the end of the year”, said Orchard, adding that IMF has shown a remarkable tolerance towards Romania, and that because the current situation in the political scene was foreseeable.

“Political noise is almost constant in Romania, thus it is already factored into our rating for the government”, Kenneth Orchard, analyst at Moody’s told Wall-Street earlier this week.