Tuesday, October 6, 2009

Romania Assigned Debt Recovery Rating From Standard & Poor’s

By Irina Savu

Oct. 5 (Bloomberg) -- Standard & Poor’s assigned a recovery rating of 3 to Romania, reflecting the company’s estimate creditors may be able to recover between 50 percent and 70 percent of claims if the country defaults.

The rating is “based on a default scenario which assumes a disorderly adjustment in the country’s exchange rate resulting from a protracted economic contraction and increased economic policy uncertainty,” S&P credit analysts Marko Mrsnik and Frank Gill said in a statement from London today.

Romania’s failure to comply with terms of a 20 billion-euro ($29.2 billion) bailout from the European Union and International Monetary Fund, coupled with a “persistently weak external financing environment, would lead to continuous currency depreciation,” S&P said.

This “would reduce the central bank’s foreign currency reserves, and lead to foreign parent banks withdrawing their support of subsidiaries in the country,” according to Mrsnik and Gill. “We believe severe financial distress would follow, requiring government support and resulting in a sharp increase in general government debt. With support of official creditors no longer available, the government, in our view, would be unable to meet its borrowing needs.”

Political Crisis

The recovery rating is introduced in the middle of a political crisis for the Balkan nation. The Social Democrats, which last week resigned from the ruling coalition to protest the dismissal of a minister, will back an opposition call for a vote of no confidence in the minority government.

The Social Democrats will join the main opposition party, the National Liberals, Social Democrat leader Mircea Geoana said today in a televised speech. The move guarantees a parliamentary majority in favor of removing the government from office.

The recovery rating “is supported by Romania’s moderate general government debt levels even under a stressed scenario; its expected increased export capacity due to past inflows of foreign direct investment; its flexible exchange rate, which supports export competitiveness; and the government’s willingness to pursue market-oriented economic policies and to accept the validity of international investor claims.” the analysts wrote.

The leu rose 0.2 percent against the euro to trade at 4.2648 at 2:26 p.m. in Bucharest.

The EU’s second-poorest member is rated BB+ at S&P, the highest junk grade, with a negative outlook, though risks a downgrade, Fitch Ratings and S&P said last week, as political commitment to the terms of the bailout is put in question.

To contact the reporter on this story: Irina Savu in Bucharestisavu@bloomberg.net.

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