International investors treat Romania’s bonds as if they were the only sovereign titles in the European Union with a „junk” rating, but the high interest rates offered by the Ministry of Finance continue to attract buyers despite the prolonged political crisis in Bucharest.
According to the international news agency Bloomberg, the cost of a protection/insurance contract against a possible default of Romania over the next five years, measured by credit default swap (CDS) contracts, is by far the highest among the over 60 investment-grade-rated states monitored.
It is worth noting that the interest rates at which Romania borrowed on Wednesday had reached 7.35% for 10-year bonds, the highest value in the last 5 months - under the pressure of external and internal crises.
A similar situation is seen in the market for local currency bonds, where the interest/yield of Romania's two-year maturity bonds stands at 6.52% - the highest level in the European Union.
The yields of two-year bonds in lei are about 180 basis points higher than those of similar Polish bonds and approximately 235 basis points higher than those of the Czech Republic.
Many fixed-income investors (bonds in this case) consider these interest rates as adequate compensation for the risks associated with Romania, which has been in crisis since the government collapsed in May, amid austerity measures, writes Bloomberg.
Romania, considered riskier than Oman and Indonesia
On Tuesday, the cost of credit default swaps (CDS) for Romania was 144 basis points, down from 167 points at the end of April when the political crisis intensified. The next sovereign states with an "investment grade" rating that have the highest costs are Oman and Indonesia, traded at a level of about 85 basis points.
"At current levels (of interest rates), the purchase is starting to become attractive. It is the classic scenario for emerging markets: when there is excess pessimism and everyone is worried, then it is time to buy," said Juan Orts, a strategist at Société Générale SA in London.
Orts stated that Romania "dodged a bullet" when Fitch Ratings maintained the BBB- rating in July and will likely also avoid a downgrade to the "junk" category from S&P Global, in the scheduled evaluation for October 2.
Good rating, but "junk" interest rates
Bloomberg also points out that the country's external debt - for which Romania benefits from an "investment grade" rating from all major rating agencies - is trading at levels comparable to those of states with "junk" ratings, such as South Africa, Colombia, and Brazil.
Considering that interest rates and spreads have largely remained stable despite the political turbulence in Bucharest, some investors and analysts now expect a positive evolution of government bonds if policymakers will develop a rigorous budget for 2027 and avoid negative scenarios, such as early elections.
Viktor Szabo, Chief Investment Officer at Aberdeen Investments, stated that Romania offers value relative to its rating profile and sees potential for local currency bonds to perform well "in a context of stable interest rates and fiscal performance exceeding expectations."
On the other hand, "a weak or unconvincing budget proposal for 2027 could push Romania over the critical threshold" towards the "junk" category, he said.
Read the full analysis Bloomberg: Investors treat Romania's bonds as the only "junk" titles in the EU - Investors are watching the reduction of this year's deficit and expect the 2027 budget to continue the trend on Curs de Guvernare