S&P Downgrades Romania To FC 'BB+/B'; Outlook Negative

Standard & Poor's Ratings Services lowered its long- and short-term foreign currency sovereign credit ratings on Romania to 'BB+/B' from 'BBB-/A-3', and its local currency long-term rating to 'BBB-' from 'BBB', the rating agency announced on Monday.

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The 'A-3' short-term local currency rating was affirmed. At the same time, the Transfer & Convertibility (T&C) assessment was lowered to 'BBB+' from 'A-'. The outlook is negative, indicating that the balance of risks is on the downside.

"The downgrade reflects the mounting risks to Romania's real economy due to high and rising private sector leverage and the related dependency on an increasingly uncertain external financing channel," Standard & Poor's credit analyst Marko Mrsnik said.

In the absence of any significant counter-cyclical policy measures, Romania's economy has been overheating and overleveraging, a process fuelled by high non-government credit growth, which was still at 50.5% year-on-year in September 2008, Standard & Poor’s said.

The associated rapid growth of domestic demand contributed to high wage pressures and a widening of the current account deficit to 14% of GDP in 2007, via rising imports.

"Policy makers have not addressed these growing economic challenges, as the focus has shifted to the upcoming general election, which has intensified the generally antagonistic and uncooperative political environment," Marko Mrsnik said.

Romanian president Traian Basescu has approved on Friday a 50% wage hike for the education system employees, a law that would endanger the economic stability, according to the government.

Early October, the Romanian Parliament has adopted a 50% wage increase of the education system employees. Following the decision, the Government contested at the Romanian Constitutional Court the Parliament’s decision, but the Court decided the law was constitutional.

Romanian Prime Minister Calin Popescu Tariceanu said Friday the recently-approved wage hike is irresponsible and would lead to an economic catastrophe.

“Such a measure may lead to similar requests from other budget sectors and finally to a salaries-inflation spiral hard to control," Tariceanu said, adding he would do all necessary things to oppose this law.

Tariceanu said that it is unwise to adopt such a measure, given the international financial turmoil, which may spill into the Romania as well.

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