Thus, Romania was removed from the category of countries with an “investment grade” and sent to the “speculative grade” category, which has a high investment risk. Romania is the first and only country in the European Union sent into this category by Fitch. The agency downgraded Romania to “BB+” from “BBB” for long-term foreign currency loans and to “BBB-” from “BBB+” for long-term lei-denominated loans. The rating agency also downgraded Romania for short-term foreign currency debt to “B” from “A3” and the country ceiling to “BBB” from “A-”. Fitch also downgraded the cities of Bucharest and Oradea for long-term foreign currency debt to “BB+” from “BBB-”, and their perspective is now characterized as “negative” instead of “stable”.
When contacted by Business Standard, Fitch analysts indicated that the decision made for Romania was influenced by the loose budgetary policy, high public spending in an electoral year, and pressures for the depreciation of the leu. Moreover, Fitch sees the potential for a foreign currency crisis. “Romania’s evaluation was based on recent fiscal policies, expenditures made during an election year (Fitch estimates a budget deficit of 3 percent of GDP in 2008 and of 4 percent in 2009),” Andrew Colquhoun, Chief Analyst for Romania and Manager of the Fitch Sovereign Rating Division, told Business Standard.
Colquhoun added that if current trends do not change, Romania will face a high risk of a financial and foreign currency crisis. Attempts made by the National Bank of Romania to prevent excessive volatility of the leu indicate that the central bank understands the risks of a sharp depreciation of the local currency. Colquhoun believes that BNR’s “weapon” (its foreign currency reserves) may not be sufficient to overcome pressures for the depreciation of the leu.
However, Fitch’s decision is highly criticized on the Romanian financial market, which considers this “unjustified, rash, and poorly explained.” Economists
