Romania plans to sell three-year euro-denominated bonds worth 1 billion euros ($1.4 billion) on the domestic market next week as it seeks to cover its budget deficit and refinance 1.4 billion euros due Nov. 29.
The Finance Ministry will try to sell bonds on Nov. 25 to local banks at a 4.5 percent coupon rate, the ministry said on its website today. Romania plans to borrow the money at an interest below 5 percent, President Traian Basescu told public television station TVR late yesterday.
The country has 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. It rejected yesterday all bids at a five-year leu-denominated bond sale, citing “unacceptable yield bids.”
“The success of the euro-bond issue will depend on the yield the ministry is willing to pay,”Nicolaie Alexandru- Chidesciuc, the chief economist of ING Bank Romania SA, said by phone today. “If they offer a yield closer to 4.5 percent, the success will be limited; on the other hand, if they pay more than 5 percent or closer to that level, the offer will be definitely oversubscribed.”
Romania, which relies on a 20 billion-euro bailout led by the International Monetary Fund, dropped this month a self- imposed yield cap of 7 percent for one- and three-year leu- denominated debt, paying as much as 7.3 percent as it seeks to cover its budget deficit of 6.8 percent of gross domestic product. Prime Minister Emil Boc’s Cabinet increased value-added tax 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.
A rate less than 5 percent at the bond auction will justify the government decision to cut wages and raise VAT to satisfy the terms of the bailout, Basescu said.
“The Finance Ministry announced they plan to raise only 1 billion euros even though they have to refinance a larger amount as they consider that if they manage to attract more than that, then they will give a positive signal in terms of credibility,” Chidesciuc said. “It’s a false signal because if they wanted to test their credibility they should have issued on the external markets.”
IMF Mission Chief Jeffrey Franks said on Nov. 1 that the government’s plan to raise as much as 7 billion euros over three years through its euro-denominated medium-term note program is “very advanced” and “they should be ready to go next year with that program.”
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