FACTBOX-Key political risks to watch in Romania

BUCHAREST, Sept 1 (Reuters) - Recession-hit Romania, the European Union's second-poorest member, is having to take increasingly tough measures to stick within strict International Monetary Fund requirements for an economic bailout package.

The southeast European country had the fastest economic growth rates in the EU until a real estate and credit bubble burst in 2008. It now faces rising unemployment and social unrest against painful spending cuts and tax rises.

Its economy, which contracted more than 7 percent last year, is struggling to recover and dependent on a 20 billion euro ($25.3 billion), IMF-led rescue package requiring strict control of spending and the budget deficit.

Below are the main political risks for Romania:

IMF FUNDING

The IMF said last month no major policy changes were needed to maintain Romania's 20 billion euro bailout programme after the government implemented spending cuts and tax rises, needed to meet this year's fiscal gap target of 6.8 percent of gross domestic product. [ID:nLDE6730J7]

The government has slashed public wages by 25 percent and raised value-added tax by 5 percentage points to 24 percent. A plan to cut pensions was declared illegal by the constitutional court and the tax hike replaces those savings.

Austerity measures eroded support for the government and a divided parliament is likely to prevent much-needed reforms and leave Romania struggling to meet its IMF commitments. [ID:nLDE67P0FJ]

Demand for Romania's debt plummeted and the cost of insuring it rose when the IMF deal was put on hold due to a political crisis in late 2009. The leu currency also fell EURRON=, indicating how sensitive markets are to any hold-up in payments.

Romania is again struggling to sell debt at yields it is willing to pay, and the leu and blue-chip stocks .BETI fell after the constitutional court ruled against the pension cuts in late June, again endangering the IMF deal.

What to watch:

-- Any future delay or suspension in aid disbursement or IMF demands for more cost-cutting or additional revenue raising measures would probably cause another slide in markets -- as happened in Hungary in July.

-- Will the opposition succeed in challenging the government's public sector pay cuts and tax hike in parliament? Annulment would endanger both the IMF deal and government.

-- Will Romania succeed in bringing the budget deficit within the IMF target for 2010?

-- Can it get debt auctions moving? It has often rejected bids at several one-, three- and five-year paper tenders since May 6, capping yields at a self imposed 7 percent and has sold less than planned at other auctions. [ID:nLDE67I15B]

GOVERNMENT STABILITY

President Traian Basescu was re-elected in a close and disputed ballot in December. He named centrist Emil Boc as prime minister. Boc is backed by ethnic Hungarians and independents, whose support he needs for a majority in parliament.

That ended a three-month long political crisis and led to a resumption of the international aid deal, boosting the leu and reducing the cost of insuring Romania's sovereign debt.

But Boc only narrowly survived a no-confidence vote filed by the leftist opposition in June over his planned cuts.

What to watch:

-- The opposition aims to file a fresh no-confidence motion in Boc's government, which it could probably win -- though it may prefer not to take power at such a difficult time when more spending cuts and unpopular reforms are needed. A defeat for the government would cause a full-blown political crisis and probably send markets into freefall. [ID:nLDE65E06I]

-- Coalition partners, particularly independents, could withdraw support for Boc, meaning he would have to negotiate legislation -- including badly-needed judicial reforms -- on a bill-by-bill basis.

PROTESTS AND STRIKES

Some 30,000 people rallied in Bucharest on May 19 against deep public spending cuts, casting doubt on the government's ability and willingness to force the measures through.

The leu and blue-chip stocks fell on the protest, and the cost of insuring Romania's sovereign debt rose.

What to watch:

-- Can unions can gain enough backing for general strikes to extend them beyond one day? Short-term action is unlikely to have a significant impact on markets but a prolonged national strike -- possible if resentment grows -- would raise pressure on the government and finances and eventually dent asset prices.

-- Tensions on the street are running high, and many protesters say demonstrations could grow and turn violent, which would increase the impact on foreign investors.

STALLING RECOVERY

The economy nudged out of recession in the second quarter but is likely to contract again through the rest of the year as higher VAT crimps spending. The government, international organisations and economists have all cut their forecasts and most now expect GDP to contract for 2010 as a whole.

Prospects of recovery are undermined by scarce foreign direct investment which halved in January-March, and a collapse in property prices which economists say have not yet hit bottom.

What to watch:

-- Will the central bank start tightening monetary policy due to fear of the rise in VAT pushing up inflation? It may also intervene in markets to prevent sharp swings in the leu.

-- Will higher prices dampen spending and delay recovery?

-- Any sign of Greek banks pulling in their horns to shore up their own balance sheets. Romania has borrowed some $19 billion from Greek banks, equivalent to some 14 percent of total 2009 gross domestic product.

CORRUPTION

Romania shares the top spot among EU countries in rankings of perceived corruption and its failure to fight graft poses a risk to austerity measures and to the IMF-led aid deal, both vital to economic recovery and investor confidence.

The European Union chided Romania in July for falling behind in efforts to root out rampant corruption but the government took an important step last month when it restored the powers of a Brussels-mandated anti-corruption agency. [ID:nLDE67N1PE]

What to watch:

-- Will prosecutors convict a top-level official for corruption, thus sending an important signal that graft will no longer be tolerated? This would probably not move asset prices in the short term but would send an important signal that Romania is becoming an easier place to do business.

For political risks to watch in other countries, please click on [ID:nEMEARISK] (Editing by Sonya Hepinstall) ($1=.7901 Euro)