Romania’s Political Standoff Raises Risk of Credit Rating Downgrade
By Luiza Ilie, Gergely Szakacs and Karin Strohecker
Political Impasse and Fiscal Risks Threaten Romania’s Credit Standing
BUCHAREST, Oct 1 (Reuters) - Romania's failure to install a new government on Wednesday has intensified pressure on its investment-grade credit rating, as a five-month political impasse collides with a rapid build-up of public debt that is testing the limits of fiscal sustainability.
Government Crisis and Market Reactions
Prime Minister-designate Siegfried Muresan lost a vote of confidence in parliament, extending a crisis that has already sent Romania's leu currency to record lows and pushed the country's local 10-year bond yields up some 60-80 basis points to one-year highs in the past two weeks.
Romania's international debt has been under pressure for some time, with longer-dated bonds trading at their lowest prices since May 2025 in recent days.
Upcoming Credit Rating Reviews
S&P Global is scheduled to review Romania's credit rating, which sits on the lowest rung of investment grade, with a negative outlook, on Friday.
Five-year credit default swaps have traded at levels pricing in a two-notch downgrade to BB since the start of 2025, as government cuts to rein in a surge in borrowing undermined Romania's pro-European Union ruling coalition and sent support for the Eurosceptic opposition Alliance for Uniting Romanians (AUR) surging.
Analyst Perspectives on Fiscal Progress
"Romania's public finances have been improving," Capital Economics analysts said in a note. "But far more progress needs to be made to reassure investors and remove the risk of a credit rating downgrade."
Guillaume Tresca, senior emerging market strategist at Generali Asset Management, estimated a one-in-four likelihood of an S&P downgrade, saying the ratings agency has taken a more lenient view on government formation, focusing more on deficit cuts.
"S&P and Moody's could both tolerate a more prolonged period of political instability, provided fiscal consolidation remains on course, but probably not beyond Q1 2027," he said.
"A material deviation from the fiscal consolidation path or the calling of snap elections could trigger a downgrade."
Potential Political Shifts and Budgetary Concerns
Risks from Coalition Changes
HARD-RIGHT, LEFTIST COALITION COULD DERAIL BUDGET CUTS
The setback raises the prospect of the AUR teaming up with the leftist Social Democrats to form a new parliamentary majority - an outcome investors fear could derail efforts to cut Romania's deficit just as ratings agencies prepare fresh reviews.
Romania narrowly avoided a downgrade to sub-investment grade by Fitch at the end of July and all three major ratings agencies have stressed that the country needs to pass a 2027 budget by the end of this year, laying out further reductions to the deficit.
Romania has agreed with Brussels to bring its deficit back below the EU's 3% of output ceiling by 2030.
Moody's and Fitch are scheduled to review Romania's credit rating early next year. Like S&P, both have Romania at the lowest investment-grade rating with a negative outlook.
Government Commitment to Fiscal Consolidation
Romanian interim Finance Minister Alexandru Nazare said Bucharest could not afford to slow the pace of fiscal consolidation regardless of the political turmoil.
"I have heard not once but several times the opinion that we could take a break, we get the deficit to 6% of output and pause," Nazare said at a financial conference this week.
"We cannot afford to pause. The bridge behind us is torn, there is only forward."
Debt Accumulation and Investor Sentiment
Central Bank Warnings
CONCERNING SPEED OF DEBT ACCUMULATION
The central bank also warned this week of the risks of losing control of the public finances.
"What is concerning in the case of Romania is the speed of debt accumulation in recent years, when the growth rate was triple that of the pre-pandemic period," Deputy Governor Cosmin Marinescu said.
"The consequences are immediate — interest costs are projected at 3% of GDP, so we are spending more on interest than the deficit target we aim to reach."
He said gross financing needs have topped 10% of GDP, "beyond the optimal zone for risk indicators".
Progress and Ongoing Political Risks
Romania has made some progress: the consolidated budget deficit stood at 2.89% of GDP through August, versus 4.51% a year earlier, as the government aims to lower the full-year gap to 6.2% from over 9% in 2024. But investors say that improvement could be overshadowed by political dysfunction.
"The longer the political crisis lingers, the greater the risk that it could eventually crack things from a ratings perspective," said Kathryn Exum, co-head of sovereign research and strategy at Gramercy.
A downgrade would likely trigger forced selling that pushes bond spreads wider, she added.
(Reporting by Luiza Ilie, Gergely Szakacs, Karin Strohecker and Marc Jones ; Editing by Kirsten Donovan)
