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Ruling coalition collapses

Market reaction to last days' events: Leu depreciated by 1.2% against the euro since the beginning of the trading day.

Main events in last days

Following parliamentary elections held at the end of 2008, Romania was ruled by a government backed by a coalition between the Social Democratic Party (PSD) and the Democratic Liberal Party (PD-L).

On 28 September, Prime Minister Emil Boc (PD-L) decided to dismiss Administration and Interior Minister Dan Nica (PSD) citing poor management of the ministry and his statements regarding possible fraud at the upcoming presidential elections. Boc asked the PSD to nominate another person for Interior Ministry.

PSD refused to nominate another person for the Administration and Interior Ministry. The party maintained the political support for Dan Nica saying that they will leave the government if Nica is dismissed.

Today, the president Basescu approved the dismissal of the Interior Minister and the appointment of Vasile Blaga (PDL) as interim Interior Minister. As previously announced by PSD, all the ministers appointed by PSD resigned from government this afternoon.

There are two solutions available for the next period. In the first case, interim ministers would be appointed (with remaining ministers from PD-L) and the government could function for 45 days before a new government is formed and approved by the Parliament. In the second case, a new government could be formed right now and it should be approved by the Parliament. In both cases, the situation is not easy as no party has a majority in Parliament. Also, no new coalition is on the cards at this moment. This means prolonged political instability in the months ahead. We recall also that presidential elections are scheduled for 22 November this year.

Political instability might limit the capacity of the government to further strengthen the control on the public finances (and to reduce the budget deficit). This might threat the Stand-by Agreement with the IMF and the Memorandum of Understanding Romania signed with the European Commission, which might have a negative impact on the risk perception on Romania and consequently on the exchange rate and on the real economy (further deepening the recession).

Market reaction

Leu depreciated by 1.2% against the euro since the beginning of the trading day.

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Tags: government coalition interior euro

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