Monday, October 24, 2011

Reuters: Romania debt yield demand too high

BUCHAREST: Investors in Romanian treasuries are seeking yields that are too high given the country's improving economic fundamentals and falling inflation, a deputy finance minister said on Friday.

Romanian debt managers have been struggling to sell debt at costs they deemed acceptable since August, when yields rose across maturities, reflecting market concerns over the euro zone's debt woes and tension on the local money market.

But the country's financial buffer remained intact, deputy Finance Minister Bogdan Dragoi told Reuters in a telephone interview.

"The buffer has not even fallen," he said. "We are trying to consolidate the yield curve at certain levels. Our interest is to issue debt, but not at any cost."

The finance ministry has scaled down issuance, even rejecting all bids at tenders for maturities ranging from six months to five years. It has sold 7.1 billion lei ($2.24 billion) worth of leu currency bills and bonds since August, compared with plans of just under 13 billion lei.

"I understand banks are asking for higher costs given the international context, but on the other hand I am also looking at economic fundamentals and falling inflation," he said.

The average yield for three-year bonds has risen by 40 basis points from 7.09 percent in early July to 7.49 percent on Oct. 20.

The euro zone's debt crisis is weighing on emerging European currencies and their debt due to the region's proximity to, and close trade links with, their western European Union peers.

Romania has set up a financing buffer under an International Monetary Fund-led aid deal which is designed to cover four months' borrowing needs. The finance ministry has not given specific details on the size of the buffer.

Steep fall in food prices on a better than expected harvest led inflation down sharply to 3.5 percent in September, within the central bank's 2-4 percent target.

But uncertainty over potential domestic energy price hikes and the euro zone's ongoing debt crisis have so far kept the central bank's benchmark interest rate at 6.25 percent, a record low but the highest among emerging EU states.

So far this year, Romania has sold just over 42 billion lei ($13.3 billion) in bonds and bills on the domestic market. Dragoi said longer dated issues will be cut back due to lack of interest.

"There is not enough interest for ten-year bonds so we will issue them less frequently, quarterly instead of monthly," Dragoi said.

Romania plans to tap foreign markets for the second time this year in November it has sold 1.5 billion euros earlier this year either in euros or dollars. Dragoi said the ministry will have the paperwork needed for dollar issues completed by mid-November.

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