Friday, April 3, 2009

Romanian treasuries to gain little on IMF-led loan

By Luiza Ilie

BUCHAREST, April 3 (Reuters) - Romanian treasuries are likely to get little support from a 20 billion euro foreign aid package in coming months, because of concerns over heavy future issuance and central bank pressure on yields, analysts said.

Already, little change was seen at a bond tender on Thursday, the first since the aid deal was announced, which saw yields at 11.50 percent, unchanged from previous auctions.

Since the start of the year, yields have fallen from as much as 14 percent and the curve has flattened at around 11.5 percent across maturities, despite heavy issuance and a deterioration in the macroeconomic outlook.
The finance ministry has cranked up issuance this year, selling over 20 billion lei ($6.4 billion) so far including rollovers, compared to 12.5 billion for all of 2008, as the government struggles to meet vast spending needs and settle 2008 invoices.

Analysts have said both the fall in yields and the flattening of the curve are due to the central bank, which has financed the deficit indirectly by giving banks short-term liquidity at an interest rate of 10 percent.

"So far, there has been a discrepancy, yields have been significantly below money market rates ... as there has been special central bank support via repo operations," said Rozalia Pal, head of macroeconomic research at UniCredit Tiriac.

A flat yield curve generally signifies heightened uncertainty over an economy's prospects.
In the case of Romania, investors are concerned about the depth of economic problems and recession, as well as the possibility that the central bank liquidity support might stop, under pressure from the IMF or because of a need to save budget reserves.

"This arrangement distorts an already fragile market and puts pressure on the exchange rate or FX reserves," ING Bank said in a research note. "Given the strange nature of this arrangement, a spike in yields should not be excluded (if it stops)."


While analysts say the IMF-led aid lowers the risk perception on Romanian assets, the primary market will likely not reflect it because yields are at artificially low levels.

"We see yields falling as a result of the IMF-deal, but from a higher level than the primary market one," ING senior economist Nicolaie Alexandru-Chidesciuc said.

Whereas the secondary debt market in Romania is illiquid and provides little indication of the cost of risk, investors use other securities such as a recent 2-year bond by the European Bank for Reconstruction and Development or the currency swap market as proxies.

Under the loan deal, the European Commission will give Romania 5 billion euros to fund its budget deficit over two years. A first cash instalment is seen no earlier than June, and the overall amount is not enough to cover this year's deficit.

While some analysts say the loan deal could make room for the ministry to thin out debt plans later this year, most expect strong issuance to continue, because of Romania's vast spending needs and the fast rollover of short maturities.

Less than 2 percent of 2009's offerings carry three- or five-year maturities, while 43 percent are 3-month bills. The ministry has yet to announce a total issuance figure.

"Until now, the state has been avid for liquidity and that need for local currency liquidity will likely continue," Chidesciuc said, estimating remaining issuance needs for this year at around 50 billion lei, including rollovers.
UniCredit's Pal estimates that if the ministry covers half of its shortfall via debt issues, then net issuance for all of 2009, excluding rollovers, could be 13 billion lei.

Romania, which has turned from the EU's fastest-rising economy into one of its most vulnerable because of twin budget and external deficits, is rated as a "junk" issuer by two ratings agencies.

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