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Romania: Analysts Say Country Must Reform Economy Or Face Debt Default

Ion Iliescu, the winner of Sunday's presidential runoff vote in Romania, campaigned as a leader who would bring his country closer to European Union membership. But Western financial experts are expressing skepticism about Iliescu's claims because of his poor record on reform as president from 1990 to 1996. RFE/RL correspondent Ron Synovitz examines why some analysts think a debt default may be more likely than speedy EU accession under Iliescu and his Social Democratic Party.

Prague, 13 December 2000 (RFE/RL) -- Two months ago, before the first round of voting in Romania's presidential election, analysts at international debt-rating agencies issued warnings to potential investors. A victory for the Social Democrats, they said, could lead to slower market reforms -- and thus a lowering of their perceptions of Romania's credit-worthiness.

Sunday's presidential election victory by Ion Iliescu means that his Social Democratic Party (PDSR) will have control over both the presidency and the prime minister's post.

The election results alone are not enough to alter Romania's bond ratings. But financial analysts in London and New York say they are closely watching the actions of Iliescu and his allies to see whether the election promises are kept.

In particular, financial analysts are looking for signs that the new Romanian government will be more committed to market reforms than Iliescu's party was when he served as the country's first post-communist president from 1990 to 1996.

Helena Hessel is director of Standard and Poor's division on Central and Eastern Europe. She tells RFE/RL that unless Iliescu and his Social Democrats show a strong commitment to reform, Romania will have trouble reaching a new stand-by agreement next year for loans from the International Monetary Fund, or IMF.

Hessel says Standard and Poor's current "stable" rating for Romanian government bonds would then be downgraded to warn investors that a debt default appears imminent. Any decision to lower Romania's rating would make it more difficult and expensive for Romania to borrow money through issuing bonds.

"The stable outlook (for Romania) assumes continued restructuring, continued privatizations, continued consolidation of the banking sector and so on."

Hessel explains that even the current "stable" rating on Romanian bonds from Standard and Poor's includes a warning that the country is what she calls "extremely vulnerable" to a debt default that would push it to the brink of collapse. U.S.-based Standard and Poor's is the world's leading authority on rating the ability of countries to repay their debts.

Many of Romania's shaky banks would be threatened with insolvency by a debt default. They hold many of the government's bonds and may not get their money back in the event of a default. The country's currency, the leu, could also fall rapidly on exchange markets.

"They have to have reforms. They have to have (help from) the IMF. They must have foreign direct investors. If they don't get it because this particular government behaves the way they behaved back during 1996, then we don't see a possibility for this country to avoid default."

Fitch, another leading debt-rating agency, agrees that it is essential for Iliescu's party to push reforms forward in order to maintain macroeconomic stability.

Fitch analyst Sharon Leech says that although European Union membership remains a long way off for Romania, the start of its accession process has enhanced the incentives for economic reforms. But Leech is also warning bond investors that Iliescu showed little enthusiasm for reform during his last term in office.

Based on the most recent policy priorities of the PDSR, the London-based Economist Intelligence Unit says it does not expect major changes in the macroeconomic policies of the outgoing government. That's because the PDSR has linked its economic policies to Romania's EU membership negotiations.

Still, analysts warn that a new PDSR government will be under considerable domestic pressure to increase government spending on social programs -- particularly, on pensions, welfare payments, health and education. Pressures for increased spending also could stem from Romania's commitments to implement EU regulations as part of its membership bid.

The size of Romania's budget deficits this year and next has already become an issue of contention between Bucharest and the IMF. The IMF has criticized Romania's poor revenue collection as well as the budget burden caused by the failure to privatize loss-making state firms.

President-elect Iliescu this week acknowledged the importance of shaping next year's budget in a way that helps seal a new agreement with the IMF.

"The first problem is forming the government and preparing the country for 2001 -- the budget, the first package of legislative and executive measures, and preparing for the negotiations with international financial organizations."

That leaves international financial analysts still waiting to see if Iliescu's actions on economic reforms can match the promises he made during the election campaign.