Tuesday, July 5, 2011

Romania upgraded despite Greek risk

The Financial Times
July 5, 2011
by Stefan Wagstyl

While nothing can be taken for granted, a credit upgrade for Romania that comes just as Greece may be moving towards default shows how well eastern Europe is weathering the eurozone crisis.

Fitch Ratings has raised Romania’s sovereign rating to investment level in the same week as it has indicated that it is likely to call Greece’s French debt rollover plan a default and Standard & Poor’s said the proposal would be a “selective default”.

Romania’s recovery from recession is slow, but its public finances seem secure, thanks to the sort of radical public sector cuts that Greece now needs.

Fitch’s upgrade from BBB- to BB+, announced on Monday, means two of the top three agencies now rate Romania as investment grade, with Moody’s putting it at Baa3, just above the line, and Standard & Poor’s at BB+, but below investment grade.

Ed Parker, Fitch’s head of EMEA Sovereigns, said: “Overall, there has been a material easing in Romania’s downside risks, commensurate with a return to an investment grade rating.”

Simon Quijano-Evans, the regional economist at ING, said in a note on Tuesday:

A nice surprise from Fitch’s Romania upgrade to investment grade. Although Romanian fiscal dynamics are being hurt by the very soft growth picture, Emerging Europe’s fiscal picture does continue to look better than that of peers in Western Europe, something CDS markets have been pricing in for some time. …That is clearly helping shield the region from Eurozone periphery spillover.

ING’s chart makes the point very clearly:

The striking thing, of course, is that Greece is off the scale in both directions. Otherwise, it is interesting to see that CEE states generally are rated lower by Moody’s and S&P than by the market as measured by the CDS spreads.

This suggests that the likes of Poland and the Czech Republic and even Russia should soon be upgraded by the agencies – or derated by the markets. Or that some west European states – Spain, for example – face a potential agency downgrade.

All that said, Romania is still not out of the economic woods, long-term. Deep differences persist in investors’ views of southern versus northern CEE – with the north’s economic status regarded as superior to a sometimes wayward south.

Take for example the three EU members that required European Union/International Monetary Fund assistance during the global crisis – Romania, Hungary and Latvia.

Reuters points out that while Romania’s five-year paper carried a yield of 7.34 percent last month and Budapest last week sold five-year debt at 7.11 percent on June 30, Latvia sold 10-year paper, also last week, at 5.7 percent on June 29.

The discount largely reflects the more rapid and more succcessful post-Communist economic transformation carried out in the north compared to the south of CEE. But it is likely that Greece too is having some effect, with Greek banks big investors in Romania.

So if a Greek default actually materialises there could still be some serious impact in the Balkans, the Fitch rerating notwithstanding.

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