BUCHAREST Ministers from Romania's Liberals resigned from the government on Wednesday, a day after the party quit the ruling coalition in a break-up that will trigger a confidence vote and has changed the dynamics of a presidential election in November.
The rupture has left the rump of Prime Minister Victor Ponta's Social Democrat-led alliance with a slender majority in parliament, which will likely prompt him to ask an ethnic Hungarian party to join the government to shore up his support.
The government is expected to win the confidence vote, which will likely happen on March 4. Analysts also say there is scant chance the split will trigger early an parliamentary election, which is not due until 2016.
But a reduced majority could make it harder for the government to push through reforms, including cleaning up inefficient state companies, agreed with the International Monetary Fund in a 4 billion euro aid deal.
Like other emerging markets, Romanian assets have been hit by jitters about U.S. monetary stimulus winding down, as well the political upheavals in Ukraine and Romania's own domestic political instability.
But this is a time when the European Union's second poorest state should be capitalizing on an economic rebound that has seen growth surge to 5.2 percent in the last quarter, pushed up by a stellar harvest in 2013 and a recovery in exports.
"... the point is that the country is again moving into the political volatility of the past years, which was exactly what the current government aimed to stop," said Simon Quijano-Evans, the head of emerging market research at Commerzbank.
"... any shortfalls on the political side will just lead to increased headaches for foreign investors," he added.
The Liberal leaders announced the split - triggered by a series of rows in recent weeks with their Social Democrat partners - after crisis talks late on Tuesday.
The coalition bickering had bordered on the farcical, with the leaders of Romania's two biggest parties accusing each other of not answering each other's phone calls and text messages.
Seven ministers resigned from the coalition, prompting Ponta announce interim replacements, including for the Health, Labour and Transport ministries. Ponta will keep the Finance Ministry portfolio, which he took over in February, on a temporary basis.
"We thought political risk was very high - but a collapse of the government last night was still somewhat of a shock," said a note by Nomura Global Markets Research on Wednesday.
"We do not believe the short to medium-run bullish macroeconomic story will be altered by this move and that the budget ... can remain on track," it said. "The larger concern is a slow to necessary structural reform that will be much more difficult in the heated electoral environment of this year."
Free from his obligations to the Liberals, Ponta is now able to put up his own candidate - or himself - for the presidential election in November, when his rival Traian Basescu will step down after two terms in office. Previously the coalition had planned to put up a Liberal candidate.
Under Romanian law, the president has a largely ceremonial role. But Basescu wields influence at key moments, as he has the power to veto the winning party's choice of prime minister after an election. He also has a big say in how Romania negotiates international agreements.
Ponta has repeatedly clashed with the Basescu over a series of policy proposals, most recently a new fuel tax that is a central element of Romania's IMF deal.
In an attempt to soothe investors after the news of the split, Basescu on Wednesday publicly threw his weight behind the latest IMF deal review despite his objections over the fuel tax and another policy to help low income borrowers.
Without the Liberals, Ponta may be tempted to implement a longstanding Social Democrat policy goal to scrap Romania's 16 percent flat tax, said Bucharest-based political analyst Cristian Patrasconiu. But he would have to convince investors, and the IMF, that he could do so without blowing a hole in the country's finances.
The leu was down roughly 0.2 percent on the day, trading at 4.5130 per euro.
(Additional reporting by Paul Taylor and Luiza Ilie; Editing by Alison Williams)