The gradual improvement of the risk perception had become visible in the international borrowing costs in the last two years.
Whereas the Finance Ministry had to agree to a 5.25% coupon a year for a five-year eurobond issue in 2011, last month the ten-year eurobond issue interest stood at 3.625% a year. Back in 2012, Romania released a ten-year dollar bond issue in the US offering a 6.75% coupon, only to have it down to 4.875% this year. Last but not least, the Finance Ministry issued dollar-denominated bonds maturing in thirty years this year, a first for it, at a 6.125% coupon.
During the crisis, CDS became the most visible indicator of a country’s capacity to borrow money from capital markets, signaling the trend of investor sentiment or the lack of trust in a particular issuer.
The CDS worked as a basis to set borrowing costs. The indicator became rather controversial at times due to speculative nature of some CDS transactions, driving up Romania’s risk cost.
This is why the Romanian CDS had gone through the roof at some 700 basis points (7%) in February-March 2009, rendering the country virtually unable to raise cash from private investors. Romania was regarded as one of the riskiest issuers in the region, chiefly because of the short-term foreign debt stock of some EUR20 billion.
Under the circumstances, the country decided to take out the huge almost EUR20 billion loan from the International Monetary Fund, the European Commission and the World Bank. The decision had an immediate effect on the CDS, which halved in a matter of months.
From then on, even though Romania signed two stand-by arrangemements with the IMF, the CDS continued to fluctuate heavily in connection with the international sentiment and the great fears that Greece might leave the euro zone or international financial chaos may occur.
After a relatively calm second half of 2009, when CDS had gone down to 200 basis points even, perception worsened again in 2010, so the CDS level rose towards 400 points. That was the year when the authorities made the controversial decision to hike the VAT to 24%, a decision that served to prolong the recession and put many companies out of business.
By 2011, Romania had gotten used to CDS of 300 points or more and returned to the international capital market to borrow money from private investors, not only from international financial institutions. Early 2012 came with new tension due to worsening situation in the euro zone, so Romania’s CDS went beyond 460 points even though the domestic economy did not pose any threat to international lenders.
Things began to change in the fall of 2012, when CDS started to go down heading towards 200 basis points. A year ago it dropped to less than that, as more and more foreign investors regained confidence in Romania.
CDS fell to less than 170 points in April 2014 and even further to 150 points in the last few days.
(English version by Loredana Fratila-Cristescu)