Romanian Stocks Plunge on Government's $2.5 Billion Tax Plan

(Bloomberg) -- Romanian stocks plunged and bond yields jumped the most in over three years after the government unveiled surprise measures to curb the budget deficit by raising 10 billion lei ($2.5 billion) of extra revenue, including via a levy on the foreign-dominated banking industry.

Faced with a fiscal shortfall that’s in danger of breaching European Union limits, Finance Minister Eugen Teodorovici presented a package of what he called “bold” measures to boost revenue starting in 2019. The plan would also tax energy and telecommunications companies, cap natural gas prices and may revive a controversial initiative to overhaul the retirement system.

The proposals sent the Bucharest exchange’s BET Index down 11.8 percent, the most since 2009, while other assets suffered similar fates.

  • The yield on 10-year government bonds jumped more than 30 basis points, the most in more than three years, before paring increases and trading 23 basis point higher at 5 percent
  • The leu, which normally trades in a tight range against the euro under the central bank’s managed float, weakened 0.4 percent
  • Raiffeisen Bank International AG, which operates in Romania, slumped 3.4 percent in Vienna

President Klaus Iohannis, businesses and private-pension associations all urged the government to reconsider, urging broad consultations before acting and labeling the proposed measures as hasty and illogical.

“This clearly shows there’s a problem with the budget,” Iohannis said Wednesday. “The conclusion is they don’t have money, they don’t know how to get it and they’re making up all sorts of taxes on the spot.”

Romanian Stocks Plunge on Government's $2.5 Billion Tax Plan

The revenue drive, if implemented, could help offset giveaways by the ruling Social Democrats, such as repeated hikes in state salaries that have weakened the fiscal position. But it echoes similar moves in recent years by eastern European countries such as Hungary, which also triggered an investor rout.

Romania’s banking sector is mostly controlled by western European lenders including Erste Group Bank AG, Societe Generale SA and UniCredit SpA. The natural gas industry is largely split between OMV Petrom SA, controlled by Austria’s OMV AG, and Romgaz SA, majority owned by the state.

The levy on banks’ assets -- labeled a “tax on greed” by Teodorovici -- would generate 3.6 billion lei next year. It would protect citizens from higher loan-repayment costs, kicking in if interbank rates exceed 1.5 percent, the minister said late Tuesday.

“The timing -- with a few days before going live at the beginning of 2019 -- the extent and the size of the measures taken together are deemed to have a seriously disruptive effect on the financial system as well as the energy, utilities and telecom markets,” Erste Group Bank economist Eugen Sinca said. Linking a financial tax to interbank developments “could impair the central bank’s control over its monetary policy.”

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