US steps up pressure on Romanian government

By bne IntelliNews August 14, 2012

bne -

The US piled further pressure on Romania's government when Assistant Secretary for European and Eurasian Affairs Philip Gordon met Prime Minister Victor Ponta and officials of his Social Liberal Union (USL) to express concern over their battle to permanently oust suspended president Traian Basescu.

The US move follows a letter sent on August 10 by European Commission President Jose Manuel Barroso to Romanian Prime Minister Victor Ponta, in which he spoke of his "concerns about the institutional and political developments in Romania in the aftermath of the recently held referendum."

That impeachment referendum on July 29 came after Ponta and his USL pushed parliament to suspend Basescu, alleging improper conduct and abuse of power. Romanians voted in the subsequent referendum overwhelmingly to turf Basescu out of office, but according to official results the quorum of more than 50% of the electorate was not met.

However, the USL claimed after the vote that the size of the total electorate was lower in reality than on paper and that the turnout threshold had therefore been met. The government has since been reported to be putting pressure on the country's Constitutional Court, which is due to make a final ruling on the matter on August 31.

"We heard credible allegations of large-scale fraudulent votes, attempts to change voter lists and attempts to pressure the Constitutional Court ... any of these raise questions about the ruling, regardless of what it is," Gordon was quoted as saying by Romanian news website HotNews. "If legitimacy is under question ... financial markets will be spooked, investors will find other places to go and allies will be less comfortable continuing common projects."

Indeed the markets have been spooked. According to Capital Economics, the disruption to capital flows associated with the growing political instability has caused the Romanian leu to fall by around 5% against the euro from peak to trough in July, although over the past week or so the leu has strengthened from 4.63 per euro to 4.53, pointing to the central bank stepping up its interventions in the forex market.

"For now, FX reserve coverage appears adequate and the NBR can continue its strategy for the next six months or so (and possibly more if it were to draw on the country's precautionary IMF/EU stand-by arrangement). After this, the NBR would need to supplement FX intervention with other measures, namely defensive interest rate hikes," says Capital Economics. "The key point, however, is that Romania's buffers to deal with the much bigger threat of a fresh deterioration in the external funding environment are being eroded. Accordingly, Romania remains one of the most vulnerable economies in the region to the euro-crisis."

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