What More Can Romania Do To Drive Country Risk Premium Down?

12.15.2011 By Razvan Voican

Romania has a 2012 budget draft in the Parliament that promises to slash budget deficit to 1.9% of the gross domestic product, the country posted a spectacular economic growth of 4.4% in the third quarter and the leu remains stable, out of sync with the other currencies affected by volatility in the region. However, the risk premium of the country reflected in the credit default swap quotes stands at 450 basis points, blocking any plans to borrow from the international market.

This is twice the level in the spring even though Romania has not had its rating downgraded in the meantime - on the contrary Fitch even rated it "investment grade" again, or any serious deterioration of this budget situation.

Investors are also not paying attention to the assessments of the International Monetary Fund, which did not have much to criticize the authorities in Bucharest for about the running of the precautionary arrangement, to the cash reserves of the Treasury (EUR3 billion) and of the National Bank of Romania (BNR), or to the analyses of important banks in the region, which say it is not fair that the Central and Eastern Europe should fall victim to ungrounded disaster scenarios again, as was the case in 2008 and 2009.

"It's utterly frustrating for Romania not to be able to stand out in the eyes of investors and be treated the same as the entire region, but this the reality on the market," says Mihai Tanasescu, Romania's representative to the IMF. "We are really suffering because of the situation in the euro zone, but I think that consistency of adjustment and reform measures and their implementation, the continuation of the building of fiscal and monetary anchors will eventually make a difference."

Romania is severely penalized because of its dependence on euro zone banks, which are pressured to consolidate their capitals by huge amounts and foreign analysts see cuts in lines of financing and sale of assets or subsidiaries as a necessary part of the process. Austria has recently added fuel to the fire when it announced it would force its banks to stop granting loans in the region unless their local subsidiaries can raise their own funding.

"Unfortunately, Austria caused a stir everywhere, particularly because that release of the central bank leaves room for interpretations. It is however, important that talks are held with the BNR to address these interpretation issues and there is a determination of the local banks to go on with their business. Otherwise it is clear that money will be harder to find and that there will be pressure on the customers' deposits," Tanasescu says.

Former finance minister Sebastian Vladescu believes that Romania will be able to manage deficit funding without taking money from the IMF and the EU next year, as it has the liquidity buffer at the Treasury and the already proven mechanism whereby the BNR can free up cash from minimum mandatory reserves so that banks can direct it to the Finance Ministry.

"CDS has nothing to do with what is really happening in Romania now. I mean you get the best quarterly GDP growth in the third quarter and your CDS jumps to 450 points. This is completely absurd, which is why it really does not make any sense for Romania to borrow from the US at such a time," Vladescu says.

"Were the ECB (European Central Bank) to announce tomorrow it decided to throw one trillion euros onto the market, Romania's CDS would halve overnight and we could borrow at 5% from the US. Our EUR3 billion reserve in the Treasury allows us to wait, we've got four months covered, even though I would have tried to boost it to EUR5 billion by now."

Vladescu believes that the real solution to the crisis will come when the ECB will be authorized to issue as many euros as needed to cover the debt created.

Claudiu Cercel, head of financial markets with BRD-SocGen, says that CDS have turned into 'rating agencies' and give the lead to price formation even though traded volumes are low.

"The markets have grown too accustomed to look at CDS, they have become a parameter for bond pricing and this eventually creates a vicious circle."

He, too, notes that even though Romania did its homework, it is penalized CDS-wise as if it were still slipping. "They can't distinguish any more. Slovenia, one of the richest countries in the region, is penalized because of the presence of Italian banks."

Another glaring anomaly: the US lost its AAA rating and can still borrow cheaper than before. "It's about a gigantic market, a market that can absorb shocks and respond to the need for security investors have in times of turmoil because you've got someone to sell to. Anywhere else the rating downgrade would have been very serious, in their case it's different."

Norway, which is not part of the euro zone, remains one of the countries with the best CDS in the world.

(English version by Loredana Fratila-Cristescu)