Wednesday, December 3, 2008

Romania’s Leu, Stocks Fall as Voters Fail to Elect Government

By Yon Pulkrabek and Irina Savu

Dec. 2 (Bloomberg) -- Romania’s currency and stocks fell, while investors demanded a bigger return to hold the country’s bonds after elections failed to determine a winner to tackle a growing current-account deficit and deepening financial crisis.

Romania’s leu slid 1 percent to 3.8246 to the euro at 6:58 p.m. in Bucharest, bringing its loss this year to 6.5 percent, the second-biggest drop among the currencies in new European Union members. The Bucharest Exchange Trading Index fell 1.4 percent at the close, for a decline of 70 percent so far in 2008. The MSCI Emerging Market Index lost 2.2 percent today.

The ex-communist Social Democratic Party and the Liberal Democratic Party were virtually tied in the elections, meaning neither is able to form a government on its own. The deadlock threatens to extend the losses of the BET, the world’s eighth- worst performing equities index so far this year. The leu is near a four-year low of 3.9865 against the euro reached on Oct. 6.

“It looks like the politics are going to be cloudy for quite some time and we could see more sustained pressure” on the leu if the stalemate drags on, said Nicholas Kennedy, an emerging-markets currency strategist at 4Cast Ltd. in London. “I think the market won’t be sitting on its hands.”

The new government will face a current-account deficit that has ballooned to $16 billion as economic growth slows. Romania and Bulgaria top Societe Generale SA’s list of the emerging markets most exposed to the worldwide financial crisis, based on economic indicators including financing requirements, capital flows and current-account balances.

Stocks Decline

Standard & Poor’s and Fitch Ratings have downgraded Romania’s debt rating in the past month, citing in part increased government spending.

BRD-Groupe Societe Generale, Romania’s second biggest bank controlled by France’s Societe Generale SA, slid 1.8 percent to 8.05 lei. Petrom SA, the biggest oil company in Romania and a unit of Austria’s OMV AG, fell 1.1 percent to 0.18 lei, its lowest level since Nov. 24. Rompetrol Rafinare, the country’s second-largest, dropped 3.9 percent to 0.0173 lei.

The National Liberal Party, led by current Prime Minister Calin Tariceanu, came in third place with 18.6 percent of the vote. The count is still preliminary, as candidates filed complaints against voting procedures in some stations, according to the country’ Central Electoral Bureau.

“This is the last thing the markets wanted to see,” said Elisabeth Andreew, chief currency strategist in Copenhagen at Nordea AB, Scandinavia’s biggest bank. “There is no clear winner” and that is “not good from the market’s perspective.”

Extra Yield

The leu may drop to 4 per euro if it breaches the 3.87 level, which has been “a line in the sand,” Kennedy said.

The extra yield investors demand to hold the benchmark Romanian government bond due May 2012 rather than German government bonds of similar maturity increased 5 basis points to 884 basis points, according to ING Groep prices. The yield on the notes was little changed at 11.11 percent.

Mircea Geoana, a 50-year-old former foreign minister, is the Social Democrats’ choice for prime minister. Tariceanu, who won elections four years ago and has governed amid an economic boom, ran for the Liberals and Theodor Stolojan, 65, a former premier, is the candidate of the second-place Liberal Democrats.

“We won’t see a positive market reaction this week without a stable government in place,” said Florin Irimin, a trader at Intercapital Invest SA in Bucharest. “We’ll see only tough negotiations to form a government by spring, considering no party has a clear victory.”

‘Market-Friendly’

The three main parties included promises of more spending on social programs, public-sector wages and infrastructure. Talks to form a coalition can only begin after authorities confirm the vote in coming days. The new Parliament will have to convene by Dec. 20, and fighting over the prime minister’s job may drag on into next year.

A coalition between the Social Democrats and the Liberals “is likely to lack both the coherence and resolve to carry out the much-needed fiscal tightening,” Citigroup Inc.’s Istanbul- based economist Ilker Domac wrote in a research note last week. The outcome would be “negative” for markets, he wrote.

A coalition between the Liberals and Liberal Democrats would be “the most market-friendly outcome,” according to the analyst. Still, the partnership may be unstable because of years- old feuding between the leaders of the two parties, Citigroup said.

“It looks increasingly likely that the Social Democrats will be sidelined in coalition talks,” Lucy Bethell, an emerging-market currency strategist at Royal Bank of Scotland Group Plc in London, wrote in a client note today. “That’s a good scenario for the market, though we’d delay leu longs until clear signs of policy improvement are visible.”

To contact the reporter on this story: Yon Pulkrabek in Prague at ypulkrabek@bloomberg.net; Irina Savu in Bucharest at isavu@bloomberg.net.

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