“The recovery rating is based on a default scenario which assumes a disorderly adjustment in the country’s exchange rate resulting from a protracted economic contraction and increased economic policy uncertainty,” the S&P report indicates.
According to Ionut Dumitru, Chief Economist of Raiffeisen Bank, the foreign public debt is Romania’s least important problem. “I believe that the hypothetical situation of default has an extremely low probability, considering that Romania’s foreign public debt is very small compared to that of other EU [European Union] countries. I think that the budget deficit, which is widening significantly, is of greater concern,” Dumitru told Business Standard.
According to the official, Romania’s recovery rating in case of default will not affect the eurobond issue scheduled by the Ministry of Finance for the near future. Romania’s Credit Default Swaps maintained their level in the past few days, of 255 basis points yesterday, for a euro issue on five years.
S&P indicated that “Romania's failure to comply with the conditionality of the existing EU/IMF [International Monetary Fund] agreement, amid a persistently weak external financing environment, would lead to continuous currency depreciation.” This, in turn, would lower the foreign currency reserves of the National Bank of Romania, and lead to mother banks withdrawing their support granted to their local subsidiaries, according to S&P. “We believe severe financial distress would follow, requiring government support and resulting in a sharp increase in general government debt. With support of official creditors no longer available, the government, in our view, would be unable to meet its borrowing needs,” said the analysts of the rating agency.
