Erste Sees Further Risks for Romania’s Underperforming Bonds
(Bloomberg) -- Romania’s debt market shows signs of growing investor concern about the worsening fiscal stance, underscoring the urgency to fix the country’s finances as it prepares to hold twin elections.
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The 10-year domestic government bonds are the worst performers in Europe this year, with the yield up another 5 basis points to 6.83% on Friday. The premium over similar German securities rose this week to the highest since June 2023, according to data compiled by Bloomberg.
The largest Balkan economy has been testing the limits of tolerance shown by debt investors and rating agencies for fiscal slippage in the past few years, according to Erste Group Bank AG.
“Without a meaningful and credible fiscal correction in 2025, both categories are likely to run out of patience, triggering a market-driven adjustment,” Erste’s Bucharest-based economists Ciprian Dascalu and Eugen Sinca said in a note.
Erste’s models show that the 10-year bond yield is currently trading around 30 basis points “below fair value,” they said.
Romania is scheduled to hold parliamentary elections and two rounds of voting to pick the next president in November and December.
Borrowing Abroad
Prime Minister Marcel Ciolacu’s administration has sought to balance demands for higher wages during the campaign with growing pressure from the European Union to rein in the budget shortfall. The country‘s next leadership will need to trim the deficit that’s expected to reach almost 7% of economic output this year.
To plug the widening budget hole, Romania is increasing borrowing abroad, selling an equivalent of €12.5 billion of foreign-currency bonds so far this year. The Finance Ministry has signaled plans to tap international markets two more times by the end of the year, including with a debut Samurai bond to diversify sources.
Romania, like Hungary, is ranked around the lowest investment grades by credit rating companies. The warning about Romania follows similar signals by analysts at Erste and others this week that Hungarian assets would come under continued pressure because of repeated budget overshoots and weak economic growth. Unlike Romania however, Hungary is planning to limit its foreign—currency borrowing into early 2025.
(Updates with fresh yield move in the second paragraph.)
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