An Erste Bank report suggests Romania and other CEE nations have “breathing space” for yield spikes on government bonds. CEE debt may be a more attractive proposition for investors than core eurozone bonds, which are expensive and have very low yields, according to the report. Working with a cost of servicing debt of one tenth the Government revenues as the critical point, Erste Bank analysts believe that Romania, along with the Czech Republic and Slovakia, have plenty of room to maneuver. This in effect means that, despite substantial increases in yields these countries would still be able to pay off their sovereign deb. “We calculated the critical point for individual countries at which the interest costs would exceed 10 percent of tax revenues. In case of sudden market turbulence, the debt spiral can be triggered via higher borrowing costs. Fortunately, Romania, the Czech Republic and Slovakia have much higher thresholds of average interest rates on state debt, meaning the critical point that would put the public finances under heavy pressure is more distant,” said Juraj Kotian, Co-Head Macro/Fixed Income Research CEE at Erste Group. Kotian added that Hungary should avoid borrowing at yield rates above 6 percent to keep borrowing costs within the 10 percent of tax revenues.

Despite recent downgrades by ratings agencies, most countries have not witnessed massive sell-offs of government securities. "Surprisingly, even Hungary, which lost its investment grade  and escalated disputes with the EU and IMF over controversial laws, did not witness any massive sell-off," writes the Erste report.

Poland, Romania, Turkey and Slovakia already  tapped the foreign markets in January with Eurobonds and syndicated bond  issues, while the Czech Republic and Croatia could issue Eurobonds soon. Romania and Turkey managed to place EUR 1.5 billion and USD 1.5 billion in 10-year Eurobonds in January. In 2011, Romania raised almost EUR 12 billion in state bonds, up on the previous year. Demand for the Romanian debt is already high. Romania's bond auctions in January 2012 have met high investor demand, exceeding targets each time. On January 16 nearly EUR 800 million was raised and on January 23 almost EUR 300 million. Romania racked up a further USD 1.5 billion in 10-year bonds with a 6.87 percent yield at its first debt offering denominated in dollars on January 31.

Romania raises four times its target in latest government bonds issuance

Romania’s Ministry of Finance raises almost EUR 800 mln in government bonds

Liam Lever, liam@romania-insider.com, Corina Saceanu, corina@romania-insider.com 

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