S&P Assigns Romania ‘3’ Default Recovery Rating

The ratings indicate the ability and willingness of a country to repay its hard currency debt obligations if a default occurs.

"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," S&P said in a statement Monday.

S&P currently rates Romania's hard currency debt at BB+ and its local currency debt at BBB-, both with negative outlook.

The ratings agency said the failure to comply with the terms of a foreign aid package led by a EUR13 billion loan from the International Monetary Fund would result in a "continuous currency depreciation," which in turn would lower the central bank's hard currency reserves.

"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," S&P said.

However, "the recovery rating is supported by Romania's moderate general government debt levels even under a stressed scenario; its expected increased export capacity due to past inflows of foreign direct investment; its flexible exchange rate, which supports export competitiveness; and the government's willingness to pursue market-oriented economic policies and to accept the validity of international investor claims," S&P also noted.

S&P's recovery rating is on a seven-steps scale, from 1+ to 6, with 1+ meaning the highest expectation of full recovery in the event of default.

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