By Irina Savu
June 25 (Bloomberg) -- Romania is in talks with the International Monetary Fund and European Union to avert a second freeze on payments from its bailout loan after a court threw out measures designed to help meet an IMF-mandated deficit target.
The Constitutional Court ruled today that a proposed 15 percent cut in pensions was illegal, leaving a hole in the government’s plans for meeting the IMF’s deficit target of 6.8 percent of gross domestic product. A proposed 25 percent reduction in wages doesn’t breach the Constitution, it said.
“Our main goal is to keep the IMF and EU agreement on track and meet the targets,” Prime Minister Emil Boc told reporters today in Bucharest. “We’re doing the best we can and I hope the IMF board will make a decision next week.”
The Washington-based lender was expected to meet on June 28 to review Romania’s progress toward consolidating its budget and decide on about 850 million euros ($1 billion) in payments. The 20 billion-euro loan package was first frozen on Nov. 6 after political infighting toppled the previous government. The IMF resumed payments in February after Boc’s Cabinet passed a budget for this year.
The next payment will probably be delayed, according to Kenneth Orchard, an analyst at Moody’s Investors Service.
“Moody’s perceives this as temporary issue and not a fundamental break in the program,” he said in an e-mailed response to questions. “The most likely course of events is that the government takes remedial action, probably raising some taxes, and the IMF/EU program will continue.”
Romania’s rating may come under pressure if the government is unable to meet deficit target, Orchard said.
The leu weakened 1 percent to 4.2763 per euro, the lowest in seven months, as of 2:21 p.m. in Bucharest. It was the second-biggest decliner among 25 emerging-market currencies tracked by Bloomberg after South Korea’s won. The BET equity index tumbled 4.2 percent, the most among the 93 the indexes tracked by Bloomberg.
Finance Minister Sebastian Vladescu said before the ruling that the government had a back-up plan, without providing details. President Traian Basescu said May 6 that the government had considered raising the main value-added tax to 24 percent from 19 percent and the flat income tax to 20 percent from 16 percent before choosing to cut wages and pensions.
Opposition lawmakers appealed the austerity measures to the Constitutional Court after the government survived a vote of no confidence on June 15.
The opposition may ask for another confidence vote next week because “state employees will be severely affected by the decision to cut wages,” Social Democrat leader Victor Ponta said today in a speech on Realitatea television.
The austerity program has provoked a storm of protest, with dozens of people trying to storm the presidential palace earlier today.
“The government will have to find alternative savings options, though we do not see this impacting the lending program,” said Simon Quijano-Evans, head of emerging-market research at Credit Agricole Cheuvreux in Vienna. “We remain underweight Romanian equities due to the consumer backdrop and the noise on the fiscal front,” though “we don’t see the latest events as something that justifies a leu” sell-off.