Romanian president reassures investors as government splits

BUCHAREST (Reuters) - Romanian President Traian Basescu sought to soothe investors on Wednesday by throwing his weight behind a 4 billion-euro aid deal with the International Monetary Fund that has looked under threat from a split in the ruling coalition.

Basescu had previously refused to ratify the latest review of the deal, which is key to the economic credibility of the European Union's second-poorest state. He objected to proposals for a new fuel tax and a bank loan-support scheme.

But the Liberal party pulled out of the government late on Tuesday, leaving Prime Minister Victor Ponta with only a slender majority in parliament. That could make it tougher for Romania to push through reforms, including cleaning up inefficient state companies, that the country needs to catch up with its emerging market peers in Europe.

Provided agreement is reached on the wording of a letter of intent to the IMF, Basescu will approve the aid deal review as early as Wednesday, a move he said would send a "signal of stability". The two measures he opposes are still likely to be implemented, but they will probably be taken out of the letter.

The leu eased slightly and Bucharest shares fell on Wednesday, a reminder to investors that the region abounds in local political risks that can magnify contagion effects from abroad.

"Basescu was chiefly seeking to calm down the situation and possibly appease any investor concerns after three weeks of political rows," said Adrian Basaraba, a political science professor at the University of Timisoara.

Like other emerging markets, Romanian assets have been hit by jitters about the U.S. winding down its monetary stimulus, as well the political upheavals in Ukraine and Romania's domestic political instability.

Romania should be capitalising on an economic rebound that saw growth surge to 5.2 percent in the last quarter, pushed up by a stellar harvest in 2013 and a recovery in exports.

"We thought political risk was very high - but a collapse of the government last night was still somewhat of a shock," said a note by Nomura Global Markets Research on Wednesday.

"We do not believe the short to medium-run bullish macroeconomic story will be altered by this move and that the budget ... can remain on track," it said. "The larger concern is a slow(down) to necessary structural reform that will be much more difficult in the heated electoral environment of this year."

The government break-up will trigger a confidence vote within days, which analysts expect Ponta to win. It is likely to prompt him to invite an ethnic Hungarian party into the government to help shore up support. The chance of early elections, which are not due until 2016, is seen as remote.

PRESIDENTIAL RACE

The Liberal leaders announced the split - triggered by a series of rows in recent weeks with their Social Democrat partners - after crisis talks late on Tuesday. The coalition bickering had bordered on the farcical, with the leaders of Romania's two biggest parties accusing each other of not answering each other's phone calls and text messages.

"... the point is that the country is again moving into the political volatility of the past years, which was exactly what the current government aimed to stop," said Simon Quijano-Evans, the head of emerging market research at Commerzbank. "... any shortfalls on the political side will just lead to increased headaches for foreign investors."

Seven ministers resigned from the coalition on Wednesday, prompting Ponta to announce interim replacements. He will keep the Finance Ministry portfolio, which he took over in February on a temporary basis.

Free from his obligations to the Liberals, Ponta is now able to put up his own candidate - or himself - for the presidential election in November, when his rival Basescu will step down after two terms in office. Previously, the coalition had planned to put up a Liberal candidate.

Romanian law make the president's role largely ceremonial. But Basescu wields influence at key moments, since he has the power to veto a winning party's choice for prime minister after an election. He also has a big say in how Romania negotiates international agreements.

Ponta has repeatedly clashed with Basescu over a series of policy proposals, most recently a new fuel tax.

Without the Liberals, Ponta may be tempted to implement a longstanding Social Democrat policy goal to scrap Romania's 16 percent flat tax, said Bucharest-based political analyst Cristian Patrasconiu. But he would have to convince investors, and the IMF, that he could do so without blowing a hole in the country's finances.

(Additional reporting by Paul Taylor and Luiza Ilie; Editing by Larry King)

WhatsAppFacebookTwitterLinkedinBeloudBluesky