The minority government of Emil Boc (PDL) lost a no-confidence vote parliament by 254 for and 176 votes against the motion. President Traian Basescu said he would seek talks with all parties in parliament to find a solution for this political impasse. The situation is complicated by the upcoming presidential election on 22 November. Incumbent Mr Basescu is campaigning for a second term in office. His main opponents are PSD leader Mircea Geoana and PNL leader Crin Antonescu.
Our view
A caretaker government composed of independent candidates appears to the be most likely outcome as both PSD and PNL have already voiced their support for such a solution. Alternatively, Mr Basescu could ask the PDL to stay in office until after the presidential election. Romania's next president, which should be known at latest after the second round on 6 December, will then have the option of either asking the current parliament to form a new majority government or to call for early elections, if the parties fail to agree a new coalition. The presidential election is pivotal as Mr Basescu is widely expected to ask the PDL, his former party, to form the next government, whereas Mr Geoana and Mr Antonescu would probably seek a coalition between PSD and PNL. Against this backdrop, an independent cabinet with no obvious party affiliation seems the best solution for the time being, as it would most likely focus on implementing policy instead of partisan politicking.
The IMF/EU agreement is not at risk in the coming months in our opinion. The next critical programme review is not scheduled before February 2010 and perhaps the most challenging target will be to keep the budget deficit at 7.3% of GDP. This is achievable in our opinion but would require fiscal discpline in 4Q09, which is more likely under an independent cabinet than in any other scenario in our opinion. We note that the reaction in the bond and equity markets have been relatively muted, which suggests that investors refused to panic in the view of the latest political twist in Romania. EUR-PLN has been trading higher (ie a weaker RON) but this could have been also linked to a stronger euro, as CZK, HUF and PLN also weakened on Tuesday.