Romania has painted itself into a corner by refusing to sell bonds at yields higher than 7 percent and faces a funding crunch in November when it may end up paying significantly more. The fragile coalition government is struggling to push through austerity measures to keep a 20 billion euro International Monetary Fund-led bailout on track, pushing market interest rates on Romanian debt ever higher. But the ministry has refused to give in to this verdict from investors, arguing that the eye-watering austerity measures they are taking will eventually bring yields down and that in the meantime extra cash can be found on foreign debt markets. The appointment of a new and little-known finance minister, Gheorghe Ialomitianu, has brought no change in this debt strategy. But his hand may be forced if the IMF as expected next month rules the government must stop amassing cash arrears. Dealing with the arrears – effectively hidden defaults on debts owed by schools, hospitals or other state entities to private companies – would almost certainly leave the government too short of spare cash to ignore local debt markets. “By then, financing needs would be very high and arrears would increase if they didn't give up on their current debt strategy. There is no way they could come clean out of it,” said ING Bank chief economist Nicolaie Alexandru-Chidesciuc. He said that once the finance ministry gives up its cap, yields could jump to 8 percent and then head even higher. On the secondary market – which the ministry says is too illiquid to show the real cost of its borrowing – most bonds already yield 7.25 percent or more, up from lows below 6 percent in April. Analysts also say, however, that interest in Romanian debt remains large and that the current game of cat and mouse is just aimed at forcing the government to take on more of the risk – before investors cash in on a dive in the price of debt that should steadily improve if the government sticks with austerity. The government also faces a series of potentially tight parliament votes on austerity measures and a possible no-confidence motion, all of which could heighten concerns over Romania's finances. The IMF signalled last month it will not permit Romania to continue missing quarterly arrears targets by making release of the next aid tranche conditional on the government paying 2 billion lei ($600 million) in overdue bills by end-September. The government is widely expected to meet this demand, but analysts estimate additional existing arrears of 2 billion lei, plus 1-2 billion lei more it is expected to accumulate by not raising enough cash at debt auctions. Those would probably have to be paid soon after the next IMF mission in October-November. Junk-rated Romania also needs to roll over 7 billion lei in leu- and euro-denominated local debt in November, as well as covering an average monthly budget gap of 3 billion lei. The total 13-14 billion is close to the level of debt sold in the whole of 2008 and the total raised by the ministry from the market during all of its four-month-old yield cap regime. The government is trying to compensate with euro issues, where yields are around 2 percentage points lower if currency risks are ruled out. It can also raise cash through emergency funds from money markets or bilateral deals with local banks – but it cannot do that every month, analysts said. “Issuing foreign-denominated bonds or issuing on foreign markets ... has an upper limit,” said Daniel Hewitt of Barclays Capital in London. “If they try to issue more they're going to find it increasingly difficult to issue on these markets for supplying reasons and find it increasingly more expensive.” Yields have gradually risen from April's lows of below 6 percent due to surging inflation and the unstable political situation but are still far below peaks of more than 14 percent late last year during a government collapse. Now Romania, widely praised for its austerity efforts and enjoying one of the lowest debt-to-GDP ratios in Europe, would have little problem in finding the cash it needs this year as long as it stays on the right side of the IMF. Local banks are keen to finance the government, having covered much of the losses caused by non-performing loans last year with earnings from investing in Romanian debt. But Barclays Capital's Hewitt says foreign bond investors are holding out until the ministry concedes and will be “very interested” in buying Romanian debt when yields spike. If the ministry extends its tactic and local issuance focuses on maturities of up to six months, it could end up in an even tighter funding spot – with average monthly needs reaching 8 billion lei early next year from 4-5 billion lei currently. “They probably would need to find additional funding from the IMF if they reached that situation,” said Lars Christensen, head of emerging markets research at Danske Bank.
