Worsening recession prospects and political instability increase Romania’s risk cost

Whereas early this month CDS (credit default swap) quotations – which indicate the price of insurance against possible default, had gone below 3% as the foreign markets had taken in the stability signal sent out by the IMF, in only two weeks CDS have jumped by about 1.25% to almost 4%.

What happened in the meantime? The economic decline forecasts have worsened from 4% to 6.5%, and the foreign deficit forecasts from 4.6% to 6% of GDP, with president Traian Basescu officially announcing Romania was in recession, while tensions in the ruling coalition worsened, turning into a political scandal and undermining PM Boc Cabinet’s capability to implement any anti-crisis policy. All these came amid the worsening of the risk perception of the entire region, as a result of the collapse of Latvia. Only that for other countries the increase of the risk cost was much lower than for Romania, so that an exposure to Romania has come to be considered almost as risky as an exposure to Hungary, which is thought to have much bigger macroeconomic problems that started last year.

The deterioration of the risk perception and the comments of the president about recession last week showed in a fast depreciation of the RON against the euro from 4.19 to 4.24 RON/EUR, only to have the exchange rate go back to 4.22 RON/EUR on Friday, as a result of a positive trend of all currencies in the region. At the same time, the Bucharest Stock Exchange witnessed a 5.6% decline, and the Thursday and Friday rebounds were unable to offset the abrupt corrections in the first three days.

Against this backdrop, CDS continued to go up, with the quotations rising by about 0.6% over the past week.

What does this increase mean? Mainly an increase in the price of foreign funding for Romania, including that still being repaid, whose cost is indexed to the CDS quotations.