June 8, 2020 / 11:57 AM / a month ago

UPDATE 1-Romania's bonds leap after credit rating reprieve

(Adds detail, background, quotes)

By Marc Jones

LONDON, June 8 (Reuters) - Romania’s 2024-2028 government bonds posted their biggest ever daily rise on Monday, after the country’s credit rating was spared a downgrade to ‘junk’.

S&P Global on Friday kept Bucharest’s rating at BBB-, the lowest rung of investment grade, though it also maintained its ‘negative outlook’, which is effectively a downgrade warning.

The government’s 2024-2027 bonds saw their biggest daily price gains since issuance, with rises of between 1.2 and 1.7 euro cents, while longer-term bonds jumped as much as 2.2 euro cents.

“We affirmed the rating, given Romania’s comparatively low net general government and external debt. We believe Romania will have the ability to absorb the level of deterioration we now expect for 2020,” S&P said of its decision.

Concerns about the country’s investment grade status were rumbling even before the coronavirus pummelled the economy, which is now expected to contract 5.5% this year.

The crisis seems to have catalysed formation of a government but only after months of political upheaval, including two no-confidence votes and failed attempts to force early elections.

A proposed 40% hike in state pensions has been driving rating uncertainty too. Though it is expected to be reduced to a 10% rise, the country’s budget deficit, which was already under EU scrutiny, looks set to balloon to 8% of GDP.

Moody’s and Fitch also have ‘negative outlooks’ on their equivalent Romania ratings. Moody’s has a scheduled rating review on October 23 and Fitch on October 30, followed by S&P again on December 4.

Rabobank called S&P’s rating affirmation “a much-needed reprieve” but warned that downgrade fears had only been postponed.

“Near-term risks of a downgrade have disappeared but uncertainty about the pension hike and populistic initiatives ahead of the elections mean that downgrade fears will run high into the rating reviews in 4Q20 and beyond”. (Reporting by Marc Jones; Editing by Tom Arnold, Kirsten Donovan)

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