Political uncertainties increase the likelihood of fiscal slippages, with a budget deficit exceeding the announced target, and put pressure on Romania’s local currency bonds, warn Citigroup analysts.
The domestic government securities market represents the main source of financing for the state’s borrowing needs.
Yields on 10-year bonds have risen for the fifth consecutive day, reaching 7.21%. This is the highest level in the past four weeks, as reported by Bloomberg, cited by Economedia and Profit.ro.
The fiscal agenda is essential for the markets, especially for local debt in the current political uncertainty context, stated Citigroup strategist Bhumika Gupta in a report.
"Overall, we observe an increasing probability of a larger fiscal slippage across a growing number of scenarios," she said.
The reaction of the foreign exchange market and bond market "has been moderate so far" due to largely reduced offshore account positions following the US-Iran conflict, "but we see room for additional massive sales/an accentuation of the ROMGB curve if prolonged budget uncertainty persists."
Bloomberg highlights that Romania risks losing nearly 8 billion euros from the EU's Recovery and Resilience Fund due to internal turbulences.
The impact of the political crisis caused by PSD is already felt in the stock market, which has dropped by over 2%, as well as in the interest rates demanded for Romania's loans.
"Looking at what's happening in the financial markets, we'll see that, at the opening, the Stock Exchange dropped by over 2% (as of 12:30 - ed.), and yields on 10-year government bonds have increased by about 50 basis points recently," stated Adrian Codirlașu, President of CFA Romania, on Tuesday.
The yield is essentially the interest rate investors demand to buy those bonds. If the yield rises, the state must offer a higher interest rate to attract new financing or refinance existing debt. This translates into higher costs for public debt in the future, especially if the trend continues, which is very likely.