“The sweeping statement of PM Ponta last weekend – backtracked upon later – that the funding needs for the last 45 days of 2012 are not covered by the current budget is likely to stoke uncertainty, while investors will not shrink from bidding higher in the remainder of this year and even beyond,” the bank said.
In a televised interview Sunday, Ponta said the government needed to identify new funds to cover public costs with hospitals, pension payment and with the Ministry of Administration and Interior, because the budget structure does not include the necessary resources.
However, he later recanted his statements and said the government would draw the necessary funds from other areas of the budget.
Erste noted that bond yields continued to increase at this week’s auctions, while the central bank has capped again its weekly repurchasing agreement operation in a bid to support a weakening leu.
Additionally, “inflation will keep bond prices under pressure most likely until mid-2013 and we now see the yields on five-year government notes topping 7% in the first half of 2013,” the Austrian lender said.
The Finance Ministry will have a difficult mission in financing the public debt for the reminder of 2012, Erste said. “If we add the budget deficit to cover in the remainder of this year, we can easily conclude that further budget trimming looks inevitable.”
However, the ministry could turn to international markets for the necessary financing, particularly since the country’s five-year CDS spread has narrowed to a four-year low of around 200 basis points, Erste said. The bank expects the ministry will tap foreign debt markets for around EUR750 million-EUR1 billion.
So far in 2012, Romania sold debt worth $2.25 billion in US dollar-denominated bonds and EUR750 million in euro-denominated paper.
“For the time being, the most likely short-term scenario is for local yields to drift higher, as inflationary expectations are biased upwards and the parliamentary election campaign is entering the final stretch,” Erste said.