Foreign financing could become even more expensive for Romania on the back of the political crisis

Romania"s political crisis is having indirect effects, by causing a rise in the cost of foreign financing, as foreign investors are becoming increasingly risk adverse.

This can be noticed by looking at the rise in CDS (credit default swaps), which foreign investors buy to protect themselves against the risk of default of Romanian debtors. Such investors include foreign banks or companies that decide to buy bonds issued by the major Romanian companies, Romanian mayoralties or the government.

After the CDS quotations peaked in February reaching 767.7 percentage points (7.677%), in line with improving mood of foreign investors, they fell to around 300 percentage points, in Q2, and 200 percentage points in Q3. The political crisis however caused the downward trend to reverse starting in October, to finally reach 300 percentage points last week.

Nicolaie Alexandru Chidesciuc, senior economist at ING Bank: "Given the uncertain economic situation and the postponing of the agreement with the IMF, it is possible that CDS rates for Romania could rise further. The political crisis had a definite influence which showed that CDS" spreads for Romania increased, while remaining constant for other countries in the region. Risk aversion later increased and CDS quotations rose even more".

However the analyst considers that the situation in the month of February will not occur again in the next quarters: "I think it"s unlikely we would reach February"s levels again next year. What they were reflecting at the time was the overall deterioration of the global economy, instead of just that of Romania".

The rise in CDS prices is affecting the cost of foreign financing, as lenders (banks and foreign companies) are becoming increasingly interested in insuring against the risk of Romanian banks, mayoralties, and government defaulting on their loans. Thus, by acquiring these contracts as insurance, the creditor pays a fixed amount, to the institution that issued the CDS", which increases its costs. However, they are also borne by the debtors, which will now pay the same amount of money as they would have paid a few months ago.

Another result of the rise in CDS prices is the cost of foreign funding for banks. Given the fact that most of the banks" funding comes from abroad, they will transfer part of their costs to their customers, leading to higher interest rates.

This also makes borrowing more expensive for Romania, which has already determined the Ministry of Finance to postpone until next year the issue of Eurobonds, due to the excessively high interest rates it would have been required to pay. The Ministry of Finance had intended to issue Eurobonds worth between 500 million and 1.5 billion Euros.