March 4, 2019 / 4:15 PM / 6 months ago

Rating appeal casts harsh light on Romania decision-making

LONDON (Reuters) - To its critics, Romania’s bid to overturn an expected cut in the S&P Global outlook on its prized investment grade rating suggests it rushed into major tax reforms without fully considering the impact on its reputation with markets.

FILE PHOTO: The S&P Global logo is displayed on its offices in the financial district in New York City, U.S., December 13, 2018. REUTERS/Brendan McDermid

To its admirers, the appeal is a laudable initiative to avoid a downgrade that would be damaging to the country.

Whatever the truth, an appeal against ratings rulings is a rarely-tried tactic by governments these days, and experts say Romania’s decision to take that path raises questions about how the government got itself into a predicament that could easily have been avoided.

Romania lodged its appeal on the basis that its budget plans, which include controversial bank and energy sector taxes that have riled markets and could have a negative impact on its central bank, are still to be finalised.

The prime minister’s economic adviser and former finance minister, Darius Valcov, called it a “good move” to make the appeal which buys it two weeks of time. It certainly will be if it turns out to be one of the roughly 1-in-3 of issuers who succeed in their appeals.

But it also raises questions about how things got this far, whether it could have been avoided and how much the picture can really change in S&P’s eyes in the next two weeks.

European Union rules introduced back in 2014 mean that rating agencies now have to tell governments at the start of each year exactly when they will carry out their reviews.

That means it is harder for finance ministries to claim relevant information has been ignored and is one of the main reasons why there have only been a handful of appeals in the last five years since the rules were brought in.

“If the decision is upheld, not only would the sovereign face a downgrade, but it would also be known publicly that it failed in its appeal,” said S&P’s former head of sovereign ratings Moritz Kraemer.

The last ones to have tried to appeal have been Liechtenstein, Cape Verde and Guernsey, S&P says.

Romania’s situation is somewhat unusual though. It has been hounded for its tax plans which the government had said were intended to help improve living standards and lower borrowing costs.


Bucharest’s stock market, heavy on banks and energy firms, plunged almost 20 percent though after their announcement in December and the European Central Bank and European Bank for Reconstruction and Development both voiced their criticism.

However, just days before S&P’s announcement was due and when the decision was already likely to have been made by its rating ‘committee’, Romania’s Finance Minister, Eugen Teodorovici, said publicly that there could be some key changes to tax plans.

It may have been that possibility that saw S&P accept the appeal which has given the government two weeks’ breathing space.

S&P’s presumed move would have been to cut the country’s outlook to negative from stable. While it is not a full downgrade, Romania’s position on the bottom rung of investment grade leaves it vulnerable.

Statistically, rating firms say 1-in-3 of the negative outlooks they apply end up turning into a downgrade and that can be painful.

A 2016 World Bank study, found that being cut to ‘junk’ by at least two of the major ratings agencies increases a country’s short term borrowing costs by almost 200 basis points on average.

A big portion of that move tends to happen with the first cut too, as big investment and mutual funds that only buy investment grade quality bonds tend to sell anything that is at getting close to being downgraded.

“In our view they (tax plans) should just be repealed completely,” said the Franklin Templeton’s Romania CEO Johan Meyer, who manages Fondul Proprietatea, a listed closed-end fund which has stakes in many state-owned firms.

“It is the most damaging issue we have seen in Romania for a while.”

Reporting by Marc Jones, Editing by William Maclean

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