Ratings agency Standard and Poor’s (S&P) has confirmed Romania’s BB+/B foreign-currency rating, the same as before, but cut the country’s local-currency rating from BBB-/ A-3 to BB+/B, with a stable outlook. The ratings agency also confirmed the transfer and convertibility rating at BBB+ and foreign currency debt recovery at ‘3.’

Anything below BBB- is considered junk or speculative grade investment material, writes a Financial Times blog, commenting on the decision.

These ratings result from the implementation of the new methodology that aims to reduce the gap between the foreign currency rating and the local currency rating. "This will make governments less likely to differentiate between foreign and local currency debt in cases of debt restructuring, given the increase in market globalization,” according to the Romanian Ministry of Finance (MFP).

The S&P analysts consider that the ratings assigned to Romania reflects a continued improvement in the country’s economic foundations, the MFP claims. Romania's deficit will be reduced below 5 percent of GDP in 2011 from 9 percent in 2009, the reduced costs leading to reducing the deficit in 2012. “The main objective is to increase the Romanian economy’s competitiveness through measures that will ensure the fulfillment of fiscal targets, structural reforms, stability in the financial sector, stability and better absorption of structural funds,” according to the MFP.

According to a Financial Times blog, the main reason for cutting Romania’s local currency ratings is the country’s banking sector, which is massively exposed to its Greek and Austrian parent companies. According to a recent report by ratings house Fitch, quoted by the FT blog, “31.5 per cent of Romanian banking assets are owned by Austrian banks while another 15.8 per cent are in Greek banks’ hands. As Greek and Austrian banks suffer losses, they will be forced to pull in their horns and deny their subsidiaries credits – all bad news for the Romanian economy”.

“Elsewhere, S&P is concerned that Romania’s commitment to reform may be tested by a darkening economic picture, particularly as there is an election scheduled for the end of 2012. S&P pointed to the threat posed by a European slowdown which could further weaken Romania’s balance of payments performance and increase external vulnerabilities,” writes the FT blog.

Irina Popescu, irina.popescu@romania-insider.com

(photo source: Sxc.hu)