Unlucky 13 - the legend of a fall

source : DOW JONES NEWSWIRES
Tuesday October 13th, 2009 Romanian Government has been dismissed by the parliament. This is the first time after the fall of comunism in 1989 that the government collapsed after such a measure.

Romania's government fell Tuesday as a parliament no-confidence vote in Bucharest triggered a political void in another struggling Eastern European economy.
Prime Minister Emil Boc's cabinet mustered only 176 votes from the 471-seat legislative chamber.

The collapse was expected because the coalition of Boc's Liberal Democratic Party with rival Social Democrats - the product of a virtual tie in last year's national elections - had struggled from the outset. Last week, the Social Democrats quit the coalition, paving the way for Tuesday's vote.

One of the coalition's first acts was to negotiate a EUR20 billion rescue loan from the International Monetary Fund and European Union. The government collapse puts the IMF loan at risk because a caretaker government will struggle to pass important legislation the IMF demanded, said Elizabeth Andreew, an analyst for Nordea in Copenhagen.

Whatever government is installed will be a lame-duck cabinet ahead of Romania's presidential election, the first round of which is scheduled for Nov. 22.

"Politics continues to remain the one main Achilles heel of Romania," said Simon Quijano-Evans, a strategist at Cheuvreux in Vienna.

The outcome of Tuesday's no-confidence vote was expected and had only a modest impact on markets, briefly pushing the leu down 0.4% to 4.24 against the euro, its lowest level since March, but the currency rebounded later as the day wore on.

Earlier Tuesday, Romania reported that its budget deficit rose to 5% of gross domestic product in the first nine months of the year. That is higher than the IMF was originally willing to allow, although the multilateral lender has raised its deficit cap to 7% of GDP.

However, a drastic economic slowdown - Romania's economy grew more than 8% last year but is expected to contract by more than 8% in 2009, marking one of the biggest turnarounds in Europe - has curbed the country's need for external funding. The current-account deficit in the first eight months of the year narrowed by 79%, the National Bank of Romania said earlier Tuesday.

That, along with ample foreign-exchange reserves boosted by the IMF package, may help insulate Romania from an Icelandic chill.

But the leu's resilience "unfortunately provides the wrong message to politicians," said Cheuvreux's Quijano-Evans. A ratings downgrade - which Fitch and Standard & Poor's have both warned is likely if pledges to the IMF aren't kept - is likely to be needed to focus politicians on the needs of the economy, he added.

The spread on Romanian credit-default swaps, a proxy for sovereign risk, were little changed at around 225 basis points in Tuesday trading.

Still, it may prove hard to go forward with Romania's planned Eurobond, which had initially been slated for this month. "It's unlikely to go ahead now the political situation is clearly shaky," said Elisabeth Gruie, an emerging-markets currency strategist at BNP Paribas in London.

But the main question is how the country will implement broad-brush reforms demanded by the IMF, such as a sharp cut in public-sector personnel spending, already in direct contradiction to what the two main political parties promised only a year ago.

Apart from a prospective 15% cut in the civil-servant payroll, other reforms on the table are a hike in the 19% value-added tax rate and possibly in the 16% flat income tax rate as well.

Incumbent President Traian Basescu is ahead in opinion polls but well short of a majority, according to a survey by CSOP, a Bucharest research institute, published this week. Without a majority winner, the vote will go to a second round in early December.

It is unclear whether Basescu, who brokered the Boc government, will be able to stitch together a new cabinet with a parliamentary majority, raising the prospects of snap parliamentary elections early next year.

The same CSOP poll also found that 60% of Romanians said their personal standard of living is much worse this year than in 2008.