By Irina Savu
Oct. 2 (Bloomberg) -- Romania’s credit rating may be cut if yesterday’s government breakup derails economic reforms attached to an international bailout that the European Union member is relying on to stay afloat, ratings agencies said.
“If the current situation leads to political gridlock, such that the government is prevented from carrying out its economic and fiscal consolidation program and public finances worsen, the sovereign credit ratings on Romania would come under further downward pressure,” Standard & Poor’s credit analysts Marko Mrsnik and Frank Gill said in a statement from London today.
The EU’s second-poorest member is rated BB+ at S&P, the highest junk grade, with a negative outlook. The Social Democrats yesterday resigned from office after one of their ministers was sacked by the leading coalition partner, the Liberal Democrats, leaving a minority government. The country is relying on a 20 billion euro ($29 billion) International Monetary Fund and EU loan to finance its current account and budget deficits.
The leu slipped 0.3 percent against the euro to trade at 4.2737 at 4:22 p.m. in Bucharest. The country’s benchmark stock index lost 4.4 percent, the world’s second worst performer of the 88 indexes tracked by Bloomberg. The yield on the 8.5 percent government note maturing May 2012 rose 4 basis points, or 0.04 of a percentage point.
Prime Minister Emil Boc’s minority government will have to comply with the terms of the bailout, which dictates spending cuts or revenue increases of 0.8 percent of gross domestic product to meet a budget gap within 7.3 percent of GDP this year.
The economy slumped an annual 8.7 percent in the second quarter, the most on record, and may shrink 8.5 percent this year, the government and IMF estimate. That follows a 7.1 percent expansion last year, the fastest pace in the EU.
Fitch Ratings, which also ranks Romanian debt BB+, warned yesterday it may lower that rating if political instability upsets the country’s economic reform program.
“In the event of a significant deterioration in the coherence and credibility of economic policy-making, pressure for a downgrade could increase,” Fitch analyst Andrew said in a statement. “Failure of the IMF program would intensify downwards pressure on the ratings.”
Moody’s Investors Service, the only agency which rates Romania at Baa3, the lowest investment grade with a stable outlook, said today it may change the outlook to negative if the government doesn’t go ahead with the IMF-required reforms after “this bout of political instability” calms down towards the end of the year. A negative outlook means the rating is more likely to be cut than raised or kept unchanged.
“The IMF and the EU will probably push the government much harder on the reform agenda after the election,” Moody’s analyst Kenneth Orchard said today in an e-mail. “If the government does not act, and the IMF and EU become impatient, there is a possibility that Moody’s could change the outlook on the rating to negative.”
Standard & Poor’s and Fitch Ratings cited increased government spending as one of the reasons behind their decisions last year to lower their ratings on Romania’s debt to junk. Fitch downgraded Romania two notches from BBB, while S&P cut its rating on the country from BBB-.
To contact the reporter on this story: Irina Savu in Bucharestisavu@bloomberg.net.