Biggest party in Romanian coalition set to demand PM's resignation, political crisis looms

Biggest party in Romanian coalition withdraws support for PM, political crisis looms

Romanian Political Crisis and Its Financial Implications

By Luiza Ilie

Coalition Turmoil and Immediate Political Developments

BUCHAREST, April 20 (Reuters) - Romania's ruling Social Democrats voted to withdraw their support for Liberal Prime Minister Ilie Bolojan on Monday and called on him to resign, likely triggering months of instability that will jeopardise EU funds and the country's credit rating.

After the vote at a party meeting, the leftists said they would pull their six ministers from the cabinet later this week, leaving the coalition without a parliamentary majority.

Bolojan's coalition government of four pro-European parties came together 10 months ago after a polarising presidential election in an attempt to cordon off the surging far right.

They have constantly clashed over reform measures. Bolojan has repeatedly said he will not resign.

Reforms and EU Funds at Stake

REFORMS TIED TO EU FUNDS

The leftist Social Democrats, the largest party in the coalition, have become increasingly alarmed at their loss of support to the far right in the opinion polls and at the last parliamentary election, although Romania is not due to hold another national vote until 2028.

Ratings agencies kept Romania on the last rung of investment grade after Bolojan's cabinet raised taxes and began cutting state spending to lower the European Union's largest budget deficit, but warned that political instability was a key risk.

Failure to implement further reforms by August would mean Romania losing some 11 billion euros' worth of EU recovery and resilience funds, or roughly half of its total allotment from Brussels. It must also sign 16.6 billion euros' worth of defence contracts under the EU's new rearmament initiative SAFE.

Romania's centrist President Nicusor Dan tried to reassure markets earlier on Monday, saying that the ruling parties were agreed about EU funds and deficit targets.

"Yes, we will have a political crisis, but in the essential matters we have predictability," Dan told reporters.

Financial Market Reactions

FAR RIGHT THREATENS NO-CONFIDENCE MOTION

Spreads on Romania's dollar bonds maturing in 2036 widened by 28 basis points to 256 bps in Monday trade from 228 bps on April 15.

There was no immediate comment from ratings agencies Moody's, S&P or Fitch on the political developments.

Eoghan McDonagh, a portfolio manager at Allianz Global Investors, said investors appreciated the Bolojan government's efforts to stabilise state finances.

"Any move away from this reformist path - ie Bolojan leaving his post - would be perceived negatively by the market, hence the recent move wider (in spreads)," he said.

Government Stability and No-Confidence Motions

Bolojan, who opinion surveys show is the most respected politician in the coalition government, said late on Sunday he would appoint interim ministers from the existing cabinet, who can hold the redistributed portfolios for 45 days. 

The opposition hard-right Alliance for Uniting Romanians, which leads all parties in opinion surveys, said it would file a no-confidence vote in May. The Social Democrats have said they too could file a no-confidence motion.

If the two parties were to back either of each other's motions, the government would fall, ushering in weeks of protracted negotiations between the parties to form a new coalition.

A pro-European governing majority cannot exist without the Social Democrats, the largest party in parliament with 28% of seats.

The president, who nominates the prime minister, has said the four coalition parties have no choice but to keep governing. He has ruled out appointing a premier backed by the far right.

Romania has never held a snap parliamentary election.

Reporting Credits

(Reporting by Luiza IlieAdditional reporting by Marc Jones in London and Gergely Szakacs in BudapestEditing by Gareth Jones and Allison Williams)