Romania’s Flouted Flickering Flame

Romanian securities briefly paused for relief as President Basecu retained his post on lower than majority turnout on an impeachment referendum, although almost 90 percent voted to oust him. He called the attempt a “coup d’etat” and described the outcome as the “still burning democracy flame.” The move was widely seen as prime minister Ponta’s retaliation against a corruption conviction for his mentor and a power struggle over judicial control which also raised US and EU concern over the rule of law. To assuage outcry and maintain bilateral and multilateral aid including the EUR 5 billion IMF precautionary standby he promised the European Commission a compromise which would restore constitutional court authority. The president’s popularity rating is below 20 percent, but the interim government until elections later this year has been gripped by party warfare and policy bungling. The budget deficit target of sub-3 percent of GDP went off track as privatization offerings were delayed and state firms began outright liquidation. Economic growth slid to 1 percent on 4 percent inflation and banks have felt the additional brunt of Greek and core European parent damage. The leu dropped through 4.5 to the euro as the region’s worst performer and the sovereign ratings outlook went to negative as the threshold investment-grade rating by two agencies may erode. As the leadership spat heated up a large Eurobond repayment was due on zero monthly net FDI inflows and a 5 percent of GDP current account gap which may test the 30 billion plus in foreign reserves without tapping the Fund backstop. The Bucharest exchange has been a frontier MSCI laggard and overseas holdings of local debt are just one-third of neighbors at 10 percent. The USL grouping is expected to again dominate in upcoming polls and members have urged repudiation of austerity measures at the risk of repeating historic non-compliance with IMF programs. Many also note that Bulgaria which won EU candidacy at the same time has managed without an outside stabilization pact as it recently re-tapped the sovereign bond market as a standing EMBI component.

Turkey has also drawn envy as the continent’s runaway stock market gainer at 30 percent amid heavy 20 percent overseas ownership of domestic debt now equal to public banks there. GDP growth in a combination of consumption and diversified exports has settled at 2.5 percent on single digit inflation. The current account deficit has remained around 8 percent on a firm lira and the central bank’s confusing multi-tier monetary policy has earned a reprieve from early criticism with the record to date. Along with portfolio allocation bank and corporate borrowers have maintained access to trade credit and short-term lines abroad despite geopolitical immediate doubts with the surrounding Iran and Syria sagas.