FACTBOX-Key political risks to watch in Romania

BUCHAREST, July 1 (Reuters) - Recession-hit Romania, the European Union's second-poorest member, is having to take increasingly tough measures to stick within strict International Monetary Fund requirements for an economic bailout package.

The southeast European country had the fastest economic growth rates in the EU until a real estate and credit bubble burst in 2008. It now faces rising unemployment and social unrest against painful spending cuts and tax rises.

Its economy, which contracted more than 7 percent last year, is still mired in recession and dependent on a 20 billion euro ($24.47 billion), IMF-led rescue package requiring strict control of spending and the budget deficit.

Below are the main political risks for Romania:

IMF FUNDING

The IMF has put the latest tranche of aid for Romania on hold pending spending cuts and tax rises that will be tough to push through but are needed to meet this year's fiscal gap target of 6.8 percent of gross domestic product.

The government is proposing slashing public wages by 25 percent and raising value added tax by 5 percentage points to 24 percent. A plan to cut pensions was declared illegal by the constitutional court and the tax hike replaces those savings.

Demand for Romania's debt plummeted and the cost of insuring it rose when the IMF deal was put on hold due to a political crisis in 2009. The leu currency also fell EURRON=, indicating how sensitive markets are to any hold-up in the payments.

Romania is again struggling to sell debt at yields it is willing to pay, and the leu and blue-chip stocks .BETI fell after the constitutional court ruled against the pension cuts last month, again endangering the IMF deal.

Any further delay or suspension in aid disbursement is likely to lead to another slide in markets.

What to watch:

-- Will the combination of pay cuts and VAT hike appease the IMF when its board meets this week to discuss the disbursement of the latest aid tranche?

-- Will Romania succeed in bringing the budget deficit within the IMF target for 2010?

-- Can it get debt auctions moving? It has failed to shift one-, three- and five-year paper since May 6 and has sold less than planned at other auctions.

GOVERNMENT STABILITY

President Traian Basescu was re-elected in a close and disputed ballot in December. He named centrist Emil Boc as prime minister. Boc is backed by ethnic Hungarians and independents, whose support he needs for a majority in parliament.

That ended a three-month long political crisis and led to a resumption of the international aid deal, boosting the leu and reducing the cost of insuring Romania's sovereign debt.

Greater political stability also gave the central bank room to cut interest rates to a record low to kickstart the economy. But Boc only narrowly survived a no-confidence vote filed by the leftist opposition last month over his planned cuts.

His majority is very fragile and analysts say the opposition could well win a fresh no-confidence vote, though it may prefer not to take power at such a difficult time when more spending cuts and unpopular reforms are needed. [ID:nLDE65R02C]

What to watch:

-- The opposition aims to file a fresh no-confidence motion in Boc's government, which it could probably win. A defeat for the government would cause a full-blown political crisis and probably send markets into freefall. [ID:nLDE65E06I]

-- Coalition partners, particularly independents, could withdraw support for Boc, meaning he would have to negotiate legislation -- including badly-needed judicial reforms -- on a bill-by-bill basis.

-- Basescu could replace Boc, whose unpopularity is growing because of the proposed austerity measures. But any new prime minister would be likely to have the same difficulties commanding a functioning majority.

PROTESTS AND STRIKES

Some 30,000 people rallied in Bucharest on May 19 against deep public spending cuts, casting doubt on the government's ability and willingness to force the measures through.

The leu and blue-chip stocks fell on the protest, and the cost of insuring Romania's sovereign debt rose.

Trade unions have promised more action to try to force the government to abandon its plans, but a planned one-day general strike in early June failed to gain traction.

In dozens of rallies around Romania over the past two months, protesters have chanted "Down with the government", but unions have so far not publicly backed this demand.

What to watch:

-- Can unions can gain enough backing for general strikes and to extend them beyond one day? Short-term action is unlikely to have a significant impact on markets but a prolonged national strike -- possible if resentment grows -- would raise pressure on the government and finances and eventually dent asset prices.

-- Feelings on the street are running high, and many protesters say demonstrations could grow and turn violent, which would increase the impact on foreign investors.

STALLING RECOVERY

The economy is still in recession after shrinking 0.3 percent in the first quarter from the previous three months. The government, international organisations and economists have all cut their forecasts and most now expect GDP to contract in 2010.

Prospects of recovery are undermined by scarce foreign direct investment which halved in January-March, and a collapse in property prices which economists say have not yet hit bottom.

Investors are also concerned about the possible impact of Greece's debt crisis, which could mean Greek banks pulling funding for their Romanian subsidiaries.

What to watch:

-- Will the central bank start tightening monetary policy due to fear of the rise in VAT pushing up inflation?

-- Will higher prices dampen spending and delay recovery? There is significant doubt Romania can finally pull out of recession in the second quarter.

-- Any sign of Greek banks pulling in their horns to shore up their own balance sheets. Romania has borrowed some $19 billion from Greek banks, equivalent to some 14 percent of total 2009 gross domestic product.

-- Central bank intervention in currency markets to prevent sharp swings in the leu currency.

CORRUPTION

Romania shares the top spot among EU countries in rankings of perceived corruption and its failure to fight graft poses a risk to austerity measures and to the IMF-led aid deal, both vital to economic recovery and investor confidence.

Bucharest has not only failed to make any progress since an EU report in March but has gone backwards -- passing legislation that made a Brussels-backed anti-graft body that checks politicians' wealth virtually impotent. [ID:nLDE63P0PV]

It has yet to convict a minister for corruption but has finally adopted new criminal and civil procedure codes that should smooth prosecution and speed up court decisions.

What to watch:

-- A fresh EU report on Romania's judicial progress is due in July and is likely to be critical. The harshest punishment the commission could enforce would be a temporary stop to recognition of Romanian court decisions in the EU, which could be a further deterrent to investors.

-- Will prosecutors convict a top-level official for corruption, thus sending an important signal that graft will no longer be tolerated? This would probably not move asset prices in the short term but would send an important signal that Romania is becoming an easier place to do business. (Editing by Paul Taylor)