BUCHAREST, Dec 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 struggling to recover and dependent on a 20 billion euro ($26.8 billion), IMF-led rescue package requiring strict control of spending and the budget deficit.
Below are the main political risks for Romania:
The IMF and the European Commission agreed in November to release the next tranche of loans due under Romania's 20 billion euro ($27.9 billion) bailout programme, easing concerns about the country's finances. [ID:nLDE6A00TB]
If Bucharest approves its 2011 budget in December, the IMF would hold a board meeting to rubber-stamp the disbursement of funds in early January. The Washington-based lender will discuss a fresh aid agreement with Romania early next year.
The IMF said in November no major policy changes were needed to maintain Romania's programme after the government implemented spending cuts and tax rises, needed to meet this year's fiscal gap target of 6.8 percent of gross domestic product.
Demand for Romania's debt plummeted and the cost of insuring it rose when the IMF deal was put on ice due to a political crisis in late 2009.
The leu also fell EURRON=, indicating how sensitive markets are to any hold-up in payments. Blue-chip stocks .BETI have also fallen after the constitutional court ruled against the pension cuts in June, again endangering the deal.
The EU member has struggled to raise leu debt due to concerns over whether it can cut the budget deficit, prompting investors to push for higher returns.
What to watch:
-- Will Bucharest be able to squeeze key wage and pension reform bills through parliament by the end of the year to prevent bailout money being put on hold?
-- Will Romania succeed in bringing the budget deficit within the IMF target for 2010?
-- Will it sign a fresh deal with the IMF when the current agreement expires in March? Officials say Romania does not need more cash from the IMF but that it may see its credibility and reform efforts dented if it gives up IMF scrutiny.
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.
Boc has only narrowly survived two no-confidence votes so far this year over planned cuts and the political uncertainty has knocked asset prices through this year. [ID:nLDE69Q08A] What to watch:
-- The opposition is expected to file fresh no-confidence motions over the government's wage and pension reforms. Though these are highly unlikely to succeed, it indicates Boc could face repeated bids to topple him over coming months, potentially causing a full-blown political crisis and sending markets into freefall. [ID:nLDE69S1LW]
-- 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.
The economy shrank less than expected on the year in July-September, but contracted on the quarter as a VAT hike hurt households and depressed demand. International lenders expect the economy to contract about 2 percent this year.
The central bank has no reason to raise interest rates for now and there is no sign of a second round of price rises due to higher VAT, Deputy Governor Cristian Popa said.
Recovery prospects are undermined by scarce foreign direct investment which fell to 1.8 billion euros in the first half from 2.6 billion a year ago, and a collapse in property prices.
What to watch:
-- Will the central bank start tightening monetary policy due to fear of the rise in VAT pushing up inflation? It may also intervene in markets to prevent sharp swings in the leu.
-- Will higher prices dampen spending and delay recovery?
-- 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.
Some 30,000 people rallied in Bucharest on May 19 against deep public spending cuts and there was a similar sized demonstration last week during the no-confidence vote.
Other demonstrations in September and October have attracted fewer people, suggesting protests are unlikely to gain enough traction sway government policy, and have not affected markets.
What to watch:
-- Can unions can gain enough backing for general strikes 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.
Romania is third 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.
The European Union chided Romania in July for falling behind in efforts to root out rampant corruption but the government took an important step in August when it restored the powers of a Brussels-mandated anti-corruption agency. [ID:nLDE67N1PE]
What to watch:
-- 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.
For political risks to watch in other countries, please click on [ID:nEMEARISK] (Editing by Sonya Hepinstall)