Victor Ponta's new government was approved by the Romanian parliament on May 7. Showing no little ambition, the incoming cabinet has promised to stick to the conditions of Romania's International Monetary Fund (IMF) deal while also seeking to correct social imbalances. It has six months to carry out the project.
"We are ready to start implementing fundamental changes for Romanians," Prime Minister Ponta told parliament after seeing his governing programme approved by 284 votes to 92 against, according to AFP. The mandate of Ponta's government will be limited however, with general elections due in November.
Ponta was asked to form an interim government in late April after Mihai Razvan Ungureanu's administration surprisingly fell to a confidence vote as defectors from its coalition baulked in the face of continued opposition to its austerity programme. The new government, an alliance of Social Democrats and liberals, was also backed by the National Union for the Progress of Romania (UNPR), a centre-left party run by a group of independents that struck a deal with Ponta last week.
The new PM set out his ambitious aim to steer a course between the austerity backlash and the IMF in his acceptance speech. "We are determined to abide by Romania's commitments towards its partners and we have drawn up a new letter of intent with the International Monetary Fund aimed at giving a message of stability," Ponta told parliament.
"But our major commitment is towards the Romanian people," he added, reiterating that his government will seek to "correct social injustices" generated by the austerity measures taken in 2010, when public wages were cut by 25%.
The new government plans an 8% nominal increase in public wages as of June, and the repayment of social contributions to certain categories of pensioners "in accordance with a ruling from the Constitutional Court," point out analysts at Erste.
The previous government collapse came as IMF representatives arrived in Romania for a review of the €5bn top-up added late last year to Bucharest's €20bn bailout loan in 2009. Upon receiving the mandate to piece together an administration, Ponta immediately met with the delegation to assure them that he would respect the programme's conditions.
However, as new Finance Minister Florin Georgescu announced, the IMF has agreed to the restoration of public sector wages. This will see Romania's deficit target moved to 2.25% of GDP from a previous target of 1.9%, still well within the 3% limit set by Brussels.
"The IMF and EU agreed to this fiscal stimulus which will give a boost to 2012 economic growth," Erste points out. At the same time, the new cabinet promised to hand the IMF representatives a letter of intent stating its commitment to stick to the deal before they board the plane home.
The sudden change in government and added stimulus for the economy appears to have had little effect on investors however. Romania sold RON750m of one-year Treasury bills at auction as Ponta was approved, with the average yield of 5.02% unchanged from the previous auction in early April, although demand was strong enough to prompt bids worth RON2.3bn.
Meanwhile, Erste worries over the effects of the wages hike. "Our new forecast for 5-year government yields is 6.5%," write the analysts, "due to a higher budget deficit and the emergence of inflationary pressures in [the second half of 2012]."
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