ANALYSIS - Romanian vote looks set to prompt aid delay

Thu, Nov 5 12:16 AM

The Romanian opposition's rejection of a new cabinet on Wednesday will likely prompt the IMF to hold back a badly-needed aid package, as politicians are unlikely to approve a budget before a deadline next month.

Analysts expect parties to focus on winning votes ahead of a presidential poll this month rather than pushing through a tough 2010 budget by Dec. 10 as demanded by the International Monetary Fund in order for it to release a 1.5 billion euro loan tranche.

"There's no way we can get the (aid) tranche," said political commentator Mircea Marian. "What's next? I see more political wrangling and uncertainty on the horizon, bad for reforms and harmful to a quick recovery."

The election on Nov. 22 is widely expected to have no clear winner and so result in a run-off on Dec. 6, further complicating efforts to achieve consensus on the budget.

Before rejecting centrist President Traian Basescu's candidate for prime minister, Lucian Croitoru, the opposition gave a mandate for a budget to his predecessor Emil Boc, who has stayed on since his government fell last month.

But the Social Democrats (PSD) and the Liberal opposition have said they would oppose planned mass sackings of 150,000 state workers in 2010 and cuts to pensions, which are a condition of IMF aid and likely to be key to next year's budget.

"(Parties) will impose their own amendments. I expect these to be numerous and the final vote to be delayed until after Dec. 10," said Cristian Mladin, analyst at BCR bank in Bucharest. "So the budget could be passed by the end of the year, but it will be late and the tranche could be delayed until next year too."

He said the turmoil could result in an increase in CDS spreads, which represent the cost of insuring debt against default, and more expensive financing for Bucharest. The leu could also weaken to around 4.35 per euro, from 4.29 now.

RISK RISING

Romania needs the tranche to fortify its shaky finances. The economy is expected to shrink by 8-8.5 percent this year.

Battling over candidates for prime minister and has taken precedence over commitments to aid providers, leaving the IMF without a strong government to negotiate with.

"It's obviously very bad news that we still do not have a working government and opposition does not seem to want to take any responsibility. There's a very high degree of political uncertainty," said Lars Christensen of Danske Bank.

"Investors naturally do not like that -- and neither do the IMF and the EU ... It will be very hard for the IMF to pay out any money to Romania as long as there is no goverment."

The Fund has indicated some flexibility on demands including a pension system overhaul it wants by the year-end and a major reform of the unwieldy state payroll system.

Markets are waiting for potential comments from IMF representatives who will end a mission to Bucharest on Nov. 9.

Analysts also note the IMF could be lenient, as it has been in other bailout cases, most notably in Ukraine, where policymakers have repeatedly flaunted its warnings.

But the next government will still have to bring the fiscal gap to the IMF-prescribed 5.9 percent of GDP next year.

"There are high risks of the tranche being delayed, although I would not rule out lenience from the IMF," said Nicolaie Alexandru-Chidesciuc, an analyst at ING bank in Bucharest.

"No matter what government will take over, it will have to take tough measures. There is no other way."

(Writing by Michael Winfrey; Editing by Elizabeth Fullerton)

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