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(AFX UK Focus) 2010-06-11 13:10 FACTBOX-Key political risks to watch in Romania By Sam Cage BUCHAREST, June 11 (Reuters) - Recession-hit Romania, the European Union's second-poorest member, is having to take increasingly tough measures to stick within strict International Monetary Fund requirements for an economic bailout package. The southeast European country offered the fastest economic growth rates in the EU until a real estate and credit bubble burst in 2008. It now faces rising unemployment and social unrest against painful spending cuts. Its economy, which contracted more than 7 percent last year, is still mired in recession and dependent on a 20 billion euro, IMF-led rescue package requiring strict control of spending and the budget deficit. Below are the main political risks for Romania: IMF FUNDING The IMF has put the latest tranche of aid for Romania on hold pending spending cuts that will be tough to push through but are needed to meet this year's fiscal gap target of 6.8 percent of gross domestic product. The government is proposing slashing public wages by 25 percent and pensions and unemployment benefits by 15 percent. Demand for Romania's debt plummeted and the cost of insuring it rose when the IMF deal was put on hold due to a political crisis in 2009. The leu currency also fell, indicating how sensitive markets are to any hold-up in the payments. Romania is again struggling to sell debt at yields it is willing to pay, a reminder that last year's slide in markets is likely to be repeated if there is any further delay or suspension in aid disbursement. What to watch: -- Can the government force through drastic cuts or will it give in to pressure and water them down? Uncertainty over its ability to implement restraint has knocked some 2 percent off the leu in the last two weeks. -- Will it succeed in bringing the budget deficit within the IMF target for 2010? -- Can it get debt auctions moving? After failing to shift one-, three- and five-year paper since May 6, it is trying to auction six-month paper on Monday. GOVERNMENT STABILITY President Traian Basescu was re-elected in a close and disputed election in December. He named centrist Emil Boc as prime minister. Boc is backed by ethnic Hungarians and independents, whose support he needs for a majority in parliament. That ended a three-month long political crisis and led to resumption of the international aid deal, boosting the leu and reducing the cost of insuring Romania's sovereign debt. Greater political stability also gave the central bank room to cut interest rates to a record low in a bid to kickstart the economy, but Boc's majority is still fragile and he is vulnerable to defections from his own party and its allies. What to watch: -- The government faces a no-confidence vote on June 15 over its planned cuts, which it seems likely to win. A defeat would cause a full-blown political crisis and probably send markets into freefall. -- Coalition partners, particularly independents, could withdraw support for Boc, meaning he would have to negotiate legislation -- including badly-needed judicial reforms -- on a bill-by-bill basis. -- Basescu could replace Boc, whose unpopularity is growing because of the proposed austerity measures. But any new prime minister would be likely to have the same difficulties commanding a functioning majority. PROTESTS AND STRIKES Some 30,000 people rallied in central Bucharest on May 19 over deep government spending cuts, casting doubt on its ability and willingness to force the measures through. The leu and blue-chip stocks fell on the protest, and the cost of insuring Romania's sovereign debt rose. Trade unions have promised more action -- including a general strike on June 15, the same day as the no-confidence vote -- to try to force the government to abandon its plans. In dozens of protests around Romania over the past two months, protesters have chanted "Down with the government", but unions have so far not publicly backed this demand. What to watch: -- Can unions can gain enough backing to extend general strikes beyond one day? Short-term action is unlikely to have a significant impact on markets but a prolonged national strike would increase pressure on the government and finances and eventually dent asset prices. -- Feelings on the street are running high, and many protesters say the demonstrations could grow and turn violent, which would increase the impact on foreign investors. STALLING RECOVERY The economy is still in recession after shrinking 0.3 percent in the first quarter from the prior three months. The government, international organisations and economists have all cut their forecasts and most now expect flat GDP in 2010, at best. Prospects of recovery are undermined by a lack of foreign direct investment, which halved in the first quarter, and a collapse in property prices, which economists say have not yet hit bottom. Investors are also concerned about the possible impact of Greece's debt crisis, which could mean Greek banks pulling funding for their Romanian subsidiaries. What to watch: -- Will Romania finally pull out of recession in the second quarter? -- Any sign of Greek banks pulling in their horns to shore up their own balance sheets. Romania has borrowed some $19 billion from Greek banks, equivalent to some 14 percent of total 2009 gross domestic product. -- Central bank interventions in currency markets to prevent the leu rising or falling too much. CORRUPTION Romania shares the top spot in the EU corruption rankings and its failure to fight graft poses a risk to austerity measures and the IMF aid deal, both vital to economic recovery and investor confidence. Bucharest has yet to convict a minister for corruption and has failed to adopt new criminal and civil procedure codes that should smooth prosecution and speed up court decisions. It has not only failed to make any progress since an EU report in March but has gone backwards -- passing legislation that made a Brussels-backed anti-graft body which checks politicians' wealth virtually impotent. What to watch: -- A fresh EU report on Romania's judicial progress is due in July and is likely to be critical. The harshest punishment the commission could enforce would be a temporary stop to recognition of Romanian court decisions in the EU, which could be a further deterrent to investors. -- Will prosecutors convict a top-level official for corruption, thus sending an important signal that graft will no longer be tolerated? This would probably not move asset prices in the short term but would send an important signal that Romania is becoming an easier place to do business. (Editing by Kevin Liffey) ($1=3.505 Lei) Keywords: ROMANIA RISKS/ ( <mailto:sam.c...@thomsonreuters.com> sam.c...@thomsonreuters.com; +40 (0) 21 305 5266; Reuters Messaging: <mailto:sam.cage.reuters....@reuters.net> sam.cage.reuters....@reuters.net; <http://www.twitter.com/samcage> www.twitter.com/samcage) Copyright Thomson Reuters 2010 ---------------------------- Vali "Noble blood is an accident of fortune; noble actions are the chief mark of greatness." "When the power of love overcomes the love of power, the world will know peace." Aboneaza-te la <mailto:ngo_list-subscr...@yahoogroups.com> ngo_list: o alternativa moderata (un pic) la [ngolist] Please consider the environment - do you really need to print this email?
