Key insights
- Citigroup warns that political uncertainty in Romania increases the risk of fiscal slippage, potentially pressuring Romanian domestic bonds. While the market reaction has been muted due to reduced offshore positioning after the US-Iran conflict, further uncertainty could trigger a selloff. Loss of EU recovery funds is also a risk. This could lead to increased risk aversion sentiment in European markets, indirectly impacting US equities.
Investing.com -- Romania’s political instability is heightening the risk of fiscal deterioration that could pressure the country’s domestic bonds, Citigroup said.
The yield on Romania’s 10-year local-currency note climbed for a fifth consecutive day on Tuesday, rising 2 basis points to 7.21%, marking its highest level in four weeks.
The fiscal agenda remains critical for markets, particularly for local debt amid the current political uncertainty, Citi strategist Bhumika Gupta said in a report.
"Generally, we see an increasing probability of a larger fiscal slippage under an increasing amount of scenarios," Gupta said.
The currency and bond market reaction "has been so far well-behaved" due to reduced positioning from offshore accounts following the US-Iran conflict, "but we see space for further selloff/steepening in ROMGB curve if lengthy uncertainty over fiscal persists," according to the report.
Romania may also risk losing close to €8 billion from the EU’s Recovery and Resilience facility due to the domestic turmoil.
Citi expects the central bank to defend the currency at current levels and maintain low volatility given its larger reserves and the lesser magnitude of the political turmoil compared with last year’s pre-election crisis.
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