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Romania Faces Major Debt Crunch In November

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* Romania accumulating arrears, not meeting issuance plans

* Borrowing needs in Nov close to debt sales for all 2008

* Yields to spiral higher as and when Romania gives up cap

* Could yet need more IMF funding on top of current bailout

By Marius Zaharia

BUCHAREST, Sept 16 (Reuters) - Romania has painted itself into a corner by refusing to sell bonds at yields higher than 7 percent and faces a funding crunch in November when it may end up paying significantly more.

The fragile coalition government is struggling to push through austerity measures to keep a 20 billion euro International Monetary Fund-led bailout on track, pushing market interest rates on Romanian debt ever higher.

But the ministry has refused to give in to this verdict from investors, arguing that the eye-watering austerity measures they are taking will eventually bring yields down and that in the meantime extra cash can be found on foreign debt markets.

The appointment of a new and little-known finance minister, Gheorghe Ialomitianu, has brought no change in this debt strategy. But his hand may be forced if the IMF as expected next month rules the government must stop amassing cash arrears.

Dealing with the arrears -- effectively hidden defaults on debts owed by schools, hospitals or other state entities to private companies -- would almost certainly leave the government too short of spare cash to ignore local debt markets.

"By then, financing needs would be very high and arrears would increase if they didn't give up on their current debt strategy. There is no way they could come clean out of it," said ING Bank chief economist Nicolaie Alexandru-Chidesciuc.

He said that once the finance ministry gives up its cap, yields could jump to 8 percent and then head even higher.

On the secondary market -- which the ministry says is too illiquid to show the real cost of its borrowing -- most bonds already yield 7.25 percent or more, up from lows below 6 percent in April.

Analysts also say, however, that interest in Romanian debt remains large and that the current game of cat and mouse is just aimed at forcing the government to take on more of the risk -- before investors cash in on a dive in the price of debt that should steadily improve if the government sticks with austerity.

Factbox on Romania's financing position.


The government also faces a series of potentially tight parliament votes on austerity measures and a possible no-confidence motion, all of which could heighten concerns over Romania's finances.

The IMF signalled last month it will not permit Romania to continue missing quarterly arrears targets by making release of the next aid tranche conditional on the government paying 2 billion lei ($600 million) in overdue bills by end-September.

The government is widely expected to meet this demand, but analysts estimate additional existing arrears of 2 billion lei, plus 1-2 billion lei more it is expected to accumulate by not raising enough cash at debt auctions. Those would probably have to be paid soon after the next IMF mission in October-November.

Looks like the end of the year will prove interesting. Something surely is going to have to give on this global house of cards.

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