Friday, November 19, 2010

Romania Fails to Sell 5-Year Bonds on Higher Yields

Romania rejected all bids in an auction of five-year bonds as investors sought higher yields after the government this month dropped a 7 percent yield cap and signaled it may sell Eurobonds on the domestic market.

The Finance Ministry planned to raise 300 million lei ($95 million) in the auction, which attracted bids totaling 790 million lei, the central bank said on its website. The Balkan nation sold 200 million lei in five-year bonds on Oct. 21, the first sale since July, at an average yield of 7 percent.

The country struggled since July to find buyers for its leu-denominated debt on the domestic market as investors pushed for higher yields amid rising inflation forecasts triggered by a government increase in a value-added tax.

“The banks probably requested very high yields, especially after they saw that at the past two auctions the ministry paid more than 7 percent,” Florentina Manea, an economist at Royal Bank of Scotland Romania SA, said by phone. “There could have been banks that pushed the yields toward 7.3 percent.”

Romania, which relies on a 20 billion-euro ($27 billion) bailout led by the International Monetary Fund, dropped a self- imposed yield cap of 7 percent for one- and three-year debt, paying as much as 7.3 percent as it seeks to cover its budget deficit of 6.8 percent of gross domestic product.

VAT Increase

Prime Minister Emil Boc’s Cabinet increased the VAT in July by 5 percentage points to 24 percent and cut public-sector wages 25 percent to qualify for loans from the IMF, the European Union and other lenders. The central bank raised on Nov. 4 its inflation prediction for this year to 8.2 percent because of the effects of the tax increase. In August, the central bank forecast annual inflation of 7.8 percent in December and 3.1 percent at the end of 2011.

“The Finance Ministry doesn’t need as much cash as we expect the budget-deficit target to be met, but on Nov. 29 a 1.4 billion-euro bond matures, so they are trying to signal another Eurobond issue on the domestic market to cover for that,” Manea said.

The government has raised 34.2 billion lei through the sale of Treasury bills and bonds on the domestic market this year, compared with a planned 46.7 billion lei.

To contact the reporters on this story: Andra Timu in Bucharest at atimu@bloomberg.net. Irina Savu in Bucharest at isavu@bloomberg.net.

To contact the editor responsible for this story: James M. Gomez in Prague atjagomez@bloomberg.net

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