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Romania in Spending Bind as Populists Battle Ratings Firms

Romania in Spending Bind as Populists Battle Ratings Companies

(Bloomberg) -- Romania is stuck in a bind over spending as populists push measures that risk a sovereign-credit downgrade to junk.

The eastern European nation has joined the rest of the continent in ramping up public spending to ease the economic pain wrought by Covid-19. But opposition forces, who can outvote the minority government in parliament, also want to ram through pension and child-benefit hikes.

While the European Union is allowing fiscal leeway, ratings companies are unlikely to be so understanding. The three major firms have Romania at their lowest-investment level with negative outlooks. S&P Global Ratings on Friday left the country’s rating at BBB-, with the outlook remaining negative.

“We see risks to Romania’s fiscal and external balances over the next 18 months if policy makers cannot stabilize and consolidate Romania’s budgetary stance after this Covid-19-induced recession,” S&P said in a statement Friday.

Romania in Spending Bind as Populists Battle Ratings Firms

For Prime Minister Ludovic Orban, who faces elections in the fall, it’s a difficult balancing act.

“The government’s in a quandary,” said Alexandra Bechtel, an economist at Commerzbank in Frankfurt. “How can a budget deficit that’s getting out of hand as a result of the pension increases and the associated risk of a rating downgrade be avoided without alienating potential voters?”

The issue is distracting from plans to ease the economic damage from Romania’s nationwide lockdown. They include tapping almost 30 billion euros ($34 billion) in aid allocated by the EU.

The rating companies’ unease stems from a promise by the previous Social Democrat-led government, which had already made the budget deficit the EU’s widest, to boost pensions by 40% in September. Failure to do so could torpedo Orban’s hopes of winning a parliamentary majority. Going ahead could spell the end of Romania’s investment-grade status.

With that threat looming, the Finance Ministry accelerated its borrowing plans. Investors are already pricing in a downgrade: Romania’s funding costs are higher than those of countries with the same sovereign-credit rating or worse.

“What the Social Democrats are doing in parliament is economic terrorism,” Finance Minister Florin Citu said this week on Facebook.

One solution broached by Orban is to raise pensions by an amount that’s more palatable under the current circumstances, with a view to meeting the envisaged 40% over time. The question is how forgiving voters -- clamoring for better infrastructure and services in one of the EU’s poorest member-states -- would be to such a delay.

“There’s a need and social pressure to increase both pensions and child benefits,” said central-bank spokesman Dan Suciu. “But how do you square this need against reality?”

©2020 Bloomberg L.P.