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Romania´s ruling coalition collapses

RomaniaPosted by Chambers of Commerce Sweden - Southeast Europe Thu, October 01, 2009 14:26:21

Political machinations continue in Romania, with the Social Democrats (PSD) appearing this morning to walk out of the ruling coalition with the Democrat Liberal Party (PD-L), thereby raising doubts as to whether Romania is heading to early parliamentary elections.

The current spat follows the move by the prime minister, Emil Boc (PD-L), to dismiss the PSD interior minister, Dan Nica, after he alleged that the forthcoming presidential election (due to be held on November 22) would be rigged. The PD-L asked the PSD to name a replacement for Nica, and when it refused the prime minister apparently appointed a PD-L candidate, Vasile Blaga, who previously served as minister of interior. Evidently this latter move was too much for the PSD to stomach and this morning they seem to have formally left the coalition.
The PSD's move seems likely to be positioning ahead of the presidential elections which incumbent, Traian Basescu (PD-L) still seem well placed to win. Basescu continues to lead in the polls (albeit his support has fallen to around 30%) but may be forced into a run-off vote by the chairman of the PSD, Mircea Geoana, who is also expected to stand, and PNL candidate, Crin Antonescu. The latter two candidates are currently polling around the 20% mark in opinion polls. The PSD is also probably worried that its presence in a government, which has signed up for an austerity programme under a new IMF SBA, will ultimately damage its electoral prospects.

The PD-L now faces the choice of whether to go to early elections or of trying to cobble together a coalition with other opposition parties. This will be difficult though as previous coalitions with the National Liberals (PNL) have proved unstable/difficult and the latter party has thus far vowed not to re-enter a coalition with the PD-L. A PD-L/PNL coalition would though hold majorities in both the Senate (79 out of 137 seats) and the Chamber of Deputies (180 out of 334 deputies). The only alternative for the PD-L would be to look for support from the ethnic Hungarian party, the UDMR, albeit with the UDMR holding just 9 seats in the senate, and 22 in the Chamber of Deputies, this would still leave the PD-L short of a majority (the PD-L has 51 seats in the senate and 117 in the Chamber of Deputies). Note that the PNL and UDMR both filed a motion of no confidence in the Boc government only last week, which failed with the backing of just 112 deputies, short of the 236 needed to carry the motion. Clearly, it could be difficult to reformulate a majority coalition in the current tense political environment, with the PD-L having few easy options.

A political crisis is the last thing that Romania needs as the government battles to comply with an IMF programme, which plans far reaching structural reforms, as well as trimming the budget deficit from an expected 7.3% of GDP this year to 3% of GDP by 2011. The IMF board signed off on the second review of the €12.9bn IMF programme last month, agreeing to the disbursement of €1.9bn in credit. The Fund board did though call on the government to push through with reforms that would ensure a permanent reduction in current budget spending. If Romania is going to joint presidential/parliamentary elections, the implementation of these reforms could well be delayed, possibly delaying the release of the next IMF tranche.

The RON has felt the pressure over the past 24 hours, weakening to RON4.27:€1 this morning, after trading sub the 4.20 level last week on the back of the disbursement of IMF funding, plus also some hints of BNR intervention; we sense that the BNR intervened to take the RON stronger to set the stage for the official rate cut earlier this week. Prior to this the RON had been on a slowly weakening trend, managed we think by the BNR. The evidence suggests that the BNR has been in the market this morning, trying to limiting RON selling pressure. The BNR still has plenty of ammunition to manage the exchange rate, as it has around US$30bn in reserves, further replenished with the release of IMF Funds. The BNR is though very sensitive to the exchange rate, given the high level of FX borrowing by households/corporates, and will likely continue to weigh in selling FX to cap weakness to 4.30 at least in the short term (the next week). Beyond that and against the context of a protracted election campaign (parliamentary and presidential) we may well see a resumption of the steady deprecation trend, managed again heavily by the BNR. (Business New Europe, Oct 1st)

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