Yields of the Romanian securities have rapidly increased following the political chaos, the reaction of the society and the uncertainties underlying the budget that marked the last week.
A rising level of the yields indicates a decreasing confidence in the economic outlook and leads to increasing financing costs for the public debt, according to the data available on the specialized website Investing.com.
The yields of government bonds with a ten-year maturity are currently approaching 4% per year, while in October 2016 was below 2.7% per year and 3.51% at the beginning of the year. Securities with a maturity of three years had last month an increase from 1.648% on 3 January 2017 to 1.878% on 1 February.
It is noteworthy that changes in the last 12 months have reached very important levels, namely +20.04% for the ten-year bonds and + 60.71% for those with the maturity after three years. In these circumstances, despite a relatively low public debt, somewhere around 37% of GDP, the costs of interest on this debt will significantly increase in 2017.
We note that these costs incurred to just maintain the public debt at the same level and not to pay something from the amounts actually owed, reached in 2016 about 1.3% of GDP or about 10 billion lei. Significant coincidence, this is the exact amount that allegedly represented a hole in the budget execution last year.
Each increase in interest costs of only 10% means an additional one billion in the budget expenditure that already went up to the threshold of 3% of GDP allowed by the Maastricht criteria of macroeconomic stability. If we keep going like that, a potential 80% increase in the financing costs is entirely possible, which would mean an additional deficit of 1% of GDP.
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- Yield evolution of the Romanian securities
- Romania – 10 years
- Romania – 3 years
- Investing.com, 2 February 2017, 8:00
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The consequences of a socio-political slippage will immediately be noticeable and have long-term consequences.
For reference, we present the effects for the next decade, following the recent decisions, of some specific problems that will have been long forgotten by the population at the time when people pay for interests rather than benefit from schools, hospitals or modern roads.
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- Yields on 10-year securities
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Essentially, after other important countries in the region, such as Poland and Hungary, have undergone political problems related to the democracy and so forth, Romania was an island of the rule of law stability and benefited from more favourable financing conditions than them.
Now it is no longer the case and we lost, in a silly way, an important image asset to potential investors.
