Social unrest puts pressure on the leu and weakens investor confidence

• Foreign analysts predict a depreciation of the leu

Foreign analysts see the protests of the employees of the Ministry of Finance as another blow to Romania"s image, and they have already begun making pessimistic forecasts.

Consultant Bogdan Baltazar said that the protests will especially hurt the country"s image and the confidence of its creditors and investors.

"I do not think that these protests were indeed spontaneous. They were probably planned earlier. On the other hand, we now have pressure to devalue the leu, especially since British banks have already issued forecasts that the leu would depreciate, even though not dramatically", Mr. Baltazar said. He added that he didn"t believe in a depreciation of the leu.

Analysts of Morgan Stanley, Barclays Capital and Societe Generale are expecting the leu to lose almost 2% against the Euro in the coming two-three weeks, before the central bank intervenes to avoid a depreciation of 4% like the one of June.

James Lord, emerging market analyst at Morgan Stanley said: "The potential dissolution of the government poses the highest risk for the leu. The Central Bank would intervene to keep the exchange rate steady if it came under significant pressure". In his opinion, the NBR doesn"t need much to push the currency to where it wants it to go, and it has no interest in allowing a major depreciation.

The depreciation risk appeared amid the vote of no-confidence initiated by the parties in the opposition, which are opposing the austerity measures that the Government agreed on with the International Monetary Fund.

Gaelle Blanchard, emerging-market strategist at Societe Generale London, does not believe that the authorities will let the exchange rate go "much beyond" 4.35 against the euro.

"We"ve seen votes of no-confidence before. Thanks to the interventions of the central bank, the leu should remain stable in the short term", said Koon Chow, emerging-market strategist at Barclays Capital.

Also yesterday, the Alliance of the Confederations of Professional Associations in Romania (ACPR) warned that the unauthorized protests of the employees in the public financial sector pose a serious threat to Romania"s economic stability, by preventing the business environment from operating normally and driving potential investors away.

"There are many other social layers that have been affected by the crisis, in the private and in the public sector alike, who have understood that the current situation objectively requires special measures and who keep doing their job, with the goal of helping restore the economy", the officials of the ACPR said.

• Lucian Croitoru: "I am in favor of decent wages, but there are far too many employees in the public sector"

Lucian Croitoru, advisor to the governor of the NBR Mugur Isărescu, yesterday warned that the system can"t support an excessive number of employees in the public sector, but he stressed that he supports keeping public sector wages at a decent level.

"The public sector needs decent wages. But on the other hand, the system can"t afford this, because the public sector is overstaffed. There are too many people with large salaries", said Croitoru.

He reiterated that downsizing the public sector was delayed too much, and if it had been done in the beginning of 2009, the 25% wage cut would not have been needed.

"Talking about this matter is pointless now. Overstaffing remains the main problem, and the level of wages will turn into a problem sooner or later, as long as there will be an excessive number of employees", said Croitoru.

• Social unrest stopped the appreciation of the leu

Yesterday morning, the leu strengthened, and the exchange rate went down to 4.2660 - 4.2675 lei/Euro, after the first hour of the trading day, due to positive sentiment on the foreign financial markets. However, political tensions halted its rise, with the NBR posting a quotation of 4.2765 lei/Euro at noon, down slightly compared to Wednesday. At the same time, currencies in the region continued to appreciate strongly.

"The evolution of the leu seems to be correlated with the renewed social unrest. Such actions do not bode well for the country"s fiscal performance as they may influence revenue collection. Protests have capped the gains of the leu today, but these gains still remain likely, given the positive moves on the major equity markets and in the regional currencies", ING analysts comment.

At the closing of the trading session, the exchange rate had risen to 4.28 lei/euro.