LEX COLUMN: EU accession trades The EU convergence play ain't over yet. The Romanian leu has risen more than 20 per cent against the US dollar since the beginning of 2006 and is, according to Bloomberg, this year's best performing currency. It is not alone. Other assets in Romania and Bulgaria are benefiting from these countries' entry into the European Union next month. According to JPMorgan, spreads on Romanian sovereign debt have fallen from 430 basis points over German bunds five years ago to a mere 43 basis points. In euro terms, both equity markets are more than 10 times larger than they were in December 2001.
EU membership per se does not justify such rises. But improvements in the underlying economies do. Both are growing strongly; Bulgaria at nearly 6 per cent this year and Romania at 8 per cent. Public sector debt burdens have fallen dramatically. Romania's net public sector debt as a percentage of gross domestic product was just 11.8 per cent last year; Bulgaria's was 12 per cent. Standard & Poor's estimates that, despite demanding public investment needs in transport and infrastructure, Romania's debt to GDP ratio willnot rise materially this decade. The rosy picture has a few dark clouds. Both countries are running substantial current account deficits. Romania's is expected to be 10 per cent of GDP this year and Bulgaria's 14 per cent. Typically, current account deterioration has gone hand in hand with surging domestic demand and credit growth. However, strong foreign investment inflows offset this vulnerability. The final risk is political. In both countries, momentum for structural reform and fiscal stringency may slacken in the wake of EU entry. Nevertheless, both countries will then have their eyes on the next prize: euro adoption, some time after the end of the decade. This convergence play has not yet run its course. Copyright The Financial Times Limited 2006 "FT" and the "Financial Times" are trademarks of The Financial Times. -- ______________ EuroAtlantic Club monitoring Romania's journey towards the EU http://www.europe.org.ro/euroatlantic_club/ mail to: P.O.Box 13-166, Bucharest 011737 e-mail to: [EMAIL PROTECTED]
