America, the next frontier for Romania"s borrowing

The Ministry of Public Finance plans to expand the range of options available for the placement of its bonds. In its desire to lower the cost of its borrowing, it is considering tapping into the American market in the beginning of 2011.

"As it is having trouble refinancing its debt on the domestic market, Romania will expand the program to sell medium-term bonds on the foreign markets", said the secretary of state in the Ministry of Public Finance, Bogdan Drăgoi, quoted by Reuters.

In the beginning of July, the Government approved a program to borrow from the foreign markets through medium-term notes, (between 5 to 10 years) through several issues, based on a single prospectus. The issue is expected to amount to seven billion Euros, and the program is expected to last three years.

Even though the yields have increased from April"s levels of less than 6%, due to the rise of inflation and the political instability, the Ministry of Finance (MF) said that it refuses to pay yields of more than 7% on the domestic market.

Drăgoi said: "We will expand the medium term notes program to allow us to tap the American market, for which we need various documents, in the beginning of next year. The American market has the benefit of being liquid and one that prefers longer maturities. I am not saying that we are going to do it, just that we would have the possibility of doing it".

He said that later, the ministry will consider issuing notes denominated in dollars.

The medium term bonds represent an alternative solution which will allow Romania to plug its rising public deficit, after the notes denominated in lei did not have the expected success.

One of the reasons why the number of note issues has decreased lately was the recent preference of the Ministry for issuing short term bonds, which lowered the availability of medium and long term notes, according to analysts.

"The highest coupon that the Ministry of Finance will pay is 7%. On the secondary market, these 3-5 year notes, have traded at an interest rate of 7.4-7.5% these last few months, so it doesn"t make sense to sell them hoping for higher yielding investments, when the offer of instruments is so low", said Nicolae Albu, head of investments with "Erste Asset Management", the largest domestic fund manager (ed. note: investment funds commonly invest in government bonds).

Nicolae Albu considers that the raise of the VAT and the cut of the wages of public sector workers, starting with July 1st, have completely changed the investment landscape:

"The downward trend for interest rates reversed quickly and abruptly, meaning that investors who opened positions before the austerity measures were enacted are now in the red, and they are not willing to take those losses".

The officials of the NBR also recommend borrowing from the foreign markets, who said that a new agreement with the IMF would allow Romania to borrow more cheaply.

"If Romania fails to implement the proposed adjustments, its ability to raise financing will decrease. At any rate, Romania needs to borrow from the foreign markets. In my opinion it would be a good thing to conclude a new precautionary agreement with the IMF, as it would give Romania more credibility and would allow it to borrow at lower rates", said Lucian Croitoru, advisor to the governor of the NBR.

The last foray of the Ministry of Finance on the foreign markets was in March, after a long absence, when Romania borrowed one billion Euros, through a 5-year Eurobonds issue with a 5% coupon and a total annual yield of 5.17%.