UPDATE 1-Romanian parliament sticks by 40% pension hike before election

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BUCHAREST, Sept 22 (Reuters) - Romania’s parliament voted on Tuesday to raise all state pensions by 40%, undoing a smaller hike by the centrist minority government and opening the way for potential ratings cuts two months before a parliamentary election.

The centrist minority government of Prime Minister Ludovic Orban, which has raised pensions by 14% and has tried to curb other social spending initiatives by opposition lawmakers will challenge Tuesday’s hike in the Constitutional Court.

Should the challenge fail, centrist President Klaus Iohannis can also stall for time before signing the bill into law, hoping the Dec. 6 parliamentary election would lead to a new majority to avoid blowing a bigger hole in public finances.

The central bank said this week the hike would push the budget deficit to 11% of gross domestic product next year and analysts warned markets would not finance such a shortfall.

The 40% hike was first approved last year by the then ruling Social Democrats, which remain parliament’s biggest party, even though their finance minister at the time warned the stretched budget could not accommodate the higher spending.

Even before the new coronavirus pandemic, Romania was struggling with a widening budget shortfall, eroded by years of political instability and fiscal largesse that has worried the European Commission. Three major credit agencies have Romania on theirs lowest investment grade with negative outlooks. The government has estimated the pandemic will push this year’s deficit to 8.6% of GDP, with the economy contracting by 3.8%. The European Union state has reported 114,648 infections and 4,503 deaths since late February.

The Social Democrats, who lost power late last year have seen their popular support halve since a 2016 parliamentary election. Meanwhile, Orban’s Liberals stand a good chance of forming a coalition government after the December vote. (Reporting by Luiza Ilie and Radu Marinas)