Economic effects of the resignation of PSD ministers

Publish date: 02-10-2009
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The ruling coalition, which included the Social Democratic Party (PSD) and the Democratic Liberal Party (PDL) split yesterday, after all PSD ministers handed in their resignations. The decision to leave the government comes in response to the fact that President Traian Basescu accepted the removal from office of Dan Nica, Deputy Prime Minister and Minister of the Interior.

The leu plunged suddenly and the stock exchange dropped on all segments. These are the immediate effects of the exit of the Social Democratic Party from the government. Long-term effects could follow, such as less confidence in the Romanian economy, a potential rise in credit default swap (CDS), a possible delay in the eurobond issue and for some foreign investments. Moreover, the political instability could hamper the government in meeting the budget deficit target, which would endanger the stand-by agreement with the International Monetary Fund (IMF).

"The political instability could limit the government's ability to further tighten control over public finances and narrow the budget deficit. This could endanger the agreement with the IMF and the European Commission, which could have a negative impact on the perception of Romania's risk and, implicitly, on the exchange rate and the real economy. This would mean a further deepening of the recession," Ionut Dumitru, Chief Economist of Raiffeisen Bank Romania, said.

Returning to the immediate effects, the leu lost about 1.4 percent against the euro yesterday. Analysts said that the effects on the exchange rate are far more important than the decline registered on the stock exchange. "The impact on the exchange rate is much broader, because it reaches a much wider segment of the economy and the population than the effect on the stock exchange. And if the crisis lasts, it is not out of the question that we will see the leu at five units for one euro at the end of this year," economic analyst Aurelian Dochia said.

Lars Christensen, Head of the Emerging Markets Department of Danske Bank said that "this split in the Romanian government is a bad thing, because it means that the only remaining party will not be able to support the effort of fiscal contraction and the reforms for the labour market agreed upon with the IMF." On the other hand, rating agencies said that they have already considered the political instability and that, so far, Romania has not exceeded their expectations. "The outlook remains stable. A high degree of political fever has already been considered in the Baa3 rating," Kenneth Orchard, Moody's Senior Analyst, said.

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