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Sep 30, 2009 18:11 EEST
BUCHAREST (Romania), September 30 (SeeNews) – Weakening of the leu currency and increased credit risk premiums will be the two likely major economic implications of a disintegration of Romania's two-party government coalition in the current political crisis, analysts said on Wednesday.
Analysts agreed, however, that a downgrade of Romania's sovereign credit rating will be an unlikely development, as long as the fiscal programme agreed with the International Monetary Fund (IMF) is properly implemented. Romania signed a 20 billion euro ($29.2 billion) aid deal with the IMF, the European Union and the World Bank in March to support its crisis-hit economy.
Centre-left Social Democrats (PSD) threatened to leave their nine-month old coalition with centre-right Liberal Democrats (PDL) led by Prime Minister Emil Boc earlier this week if President Traian Basescu endorses the dismissal of Interior Minister Dan Nica, who is affiliated to PSD. The two coalition partners share equal number of seats in the cabinet.
Here is what analysts said:
ING ANALYST NICOLAIE ALEXANDRU-CHIDESCIUC:
"If we end up with a falling government, firstly, there will be a negative impact on the money market, a depreciation pressure on the leu, but this pressure could be softened by the central bank.
Secondly, it’s possible that the economic activity gets to suffer. Investors will lose confidence in Romania. At the moment Romania gains back this confidence and if we end up with such an uncertain situation, it’s possible that the confidence will fall significantly, which would affect investments, capital flows. Apart from that, the risk premium may rise, leading to higher interest rates.
I don’t think the country’s credit rating would be affected in the short term as credit rating agencies have always said that as long as we respect the programme agreed with the IMF, they would not change the rating."
MIROSLAV PLOJHAR, ECONOMIST AT JP MORGAN IN LONDON:
"Politics in the country is usually pretty noisy, so the consequence for the market and the economy is rather limited. However, a potential fall of the government probably would not be a big deal for the market, given that the market is driven to a greater extent by the sentiment on the global markets.
The long-term implications would depend on whether a potentially new government would like to fulfil at least part of the promises that the current government gave to the IMF. If not, then the consequences for the capital market would be much bigger than just the usual reaction.
I think in the current environment of positive mood on global markets, probably the reaction would not be strong, but it can become stronger if sentiment worsens. But again, everything is hypothetical, about what would happen with the government and what would happen on global markets.
Just because of a falling government I don’t think there would be a rating cut. It would depend more on how a new government would perform."
TOTH GYULA, EASTERN EUROPE ECONOMIST AT CAIB/BANK AUSTRIA:
"The economic consequences depend on the fiscal side of things. At the moment there’s an IMF programme in place. […] In the long term, it’s not necessarily bad, depending on the fiscal policy of the next government.
It’s definitely not going to be good news for the currency but recently it’s been supported by the central bank I think and it should be the case.
I don’t expect a downgrade because of this [a fall of the government]."
LIVIU VOINEA, DIRECTOR OF BUCHAREST-BASED GROUP OF APPLIED ECONOMICS INDEPENDENT THINK-TANK:
"I think that every political crisis, not necessarily this one, in the context of an economic crisis leads to higher credit risk premium, higher credit costs, and probably some malfunctions would occur regarding the payments from the public to the private sector.
A perception of a higher risk is possible, but that would not necessarily reflect on the rating and then, as a consequence, we may witness a higher interest rate for the credits taken out by Romania.
Any government will continue to pursue IMF-prescribed reforms because in general these are monetary-related conditions. Even structural reforms also have monetary implications. For example, the new unified wage law is considered a structural reform, but still it is strictly monetary-related. Probably, the agreement with the IMF will be fulfilled."
($ = 0.6834 euro)
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