Coalition Split Pressures Romanian Leu, Endangers IMF Targets - Analysts

ING Bank Romania economist Nicolaie Chidesciuc said that if IMF reform programs were put on hold, that would affect the exchange rate and interests, triggering a higher unemployment rate, among others.

Chidesciuc said the entire 2010 will be characterized by high risks, as a minority government would not be able to adopt the necessary adjustment measures.

"This means that the future government will have to compensate by taking tough measures, and markets will react," Chidesciuc said.

Romania's ruling coalition collapsed on Thursday, after social democrat ministers resigned en masse to protest the sacking of one of their ministers in the Cabinet. The coalition was thrown into turmoil this week after centrist Prime Minister Emil Boc sacked interior minister and deputy premier Dan Nica and proposed a successor from his own Democrat Liberal Party.

The leu has fallen more than 1% on the day against the euro, and the Bucharest-listed stocks took a dive.

"The bad thing is that this internal crisis overlaps the regional uncertainties triggered by the international crisis. The current instability will clearly have negative effects on investors' perception and on the exchange rate," said Laurian Lungu, general manager of the macroeconomic forecasts institute Macroanalitica.

Lungu added that no central bank could resist "exaggerate" pressures over the exchange rate, which might occur unless Romania meets the IMF agreement conditions.

In his turn, Ionut Dumitru, chief-economist of Raiffeisen Bank Romania, said that the political instability triggers negative effects over the exchange rate, investors' perception and, eventually, over the real economy.

Dumitru added that the IMF obligations would be a priority for economy at the moment, given that Romania depends on its financing.

"The most important for the exchange rate evolution would be to show responsibility at political level," Dumitru said.

Dumitru and Lungu agreed that Moody's might also downgrade Romania from "investment grade" category given the coalition collapse, as it is the only major rating agency left that still has Romania on a stable, investment-friendly recommendation.

S&P analyst Marko Mrsnik told MEDIAFAX that the rating agency may downgrade its sovereign rating on Romania if political events will lead to misfires in fulfilling its commitments for fiscal and economic strengthening, as agreed with the International Monetary Fund and the European Commission.

S&P has already placed Romania in the "junk" category, shortly before the parliamentary elections last fall.

Romania secured end-March a EUR19.95 billion financial aid from the IMF, the European Union and other international institutions to cope with the deepening recession. IMF granted Romania a EUR12.95 billion two-year stand-by loan, as part of the financial package, conditioned by fiscal and institutional reforms.

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