BUCHAREST (Reuters) - Romania's president and prime minister said they were still committed to reforms agreed with the International Monetary Fund on Wednesday, after a split in the ruling coalition threatened the IMF deal and worried investors.
After a weeks-long standoff with the government, President Traian Basescu abruptly threw his weight behind the latest review of a 4 billion-euro aid agreement that is key to the credibility of the European Union's second-poorest state.
Separately, Prime Minister Victor Ponta underlined his government's commitment to reforms, seeking to dispel fears he would try to implement an ambitious privatization agenda with a reduced parliamentary majority in an election year.
The Liberal party had pulled the plug on Ponta's Social Democrats after crisis talks on Tuesday evening, as Romania's two biggest parties jockeyed for position ahead of European elections in late May and a presidential vote in November.
The leu eased slightly and Bucharest shares fell on Wednesday, a reminder to investors that the region abounds in local political risks that can magnify contagion from abroad.
"This is not a political or governmental crisis. It is a crisis inside the governing coalition, which has not influenced the act of government," Ponta said.
Basescu had previously refused to ratify the latest review of the IMF deal, objecting to proposals for a new fuel tax and a bank loan-support scheme.
Provided agreement is reached on the wording of a letter of intent to the IMF, Basescu will approve the aid deal review as early as Wednesday, a move he said would send a "signal of stability". The two measures he opposes are still likely to be implemented, but they will probably be taken out of the letter.
Like other emerging markets, Romanian assets have been hit by several different threats: the U.S. winding down its monetary stimulus, political upheaval in Ukraine and Romania's own political instability.
But Romania should be capitalizing on an economic rebound that saw growth surge to 5.2 percent in the last quarter, pushed up by a stellar harvest in 2013 and a recovery in exports.
"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(down) to necessary structural reform that will be much more difficult in the heated electoral environment of this year."
The government break-up will trigger a confidence vote within days, which analysts expect Ponta to win. It is likely to prompt him to invite an ethnic Hungarian party into the government to help shore up support. The chance of early elections, which are not due until 2016, is seen as remote.
The Liberal leaders announced the split after a series of rows in recent weeks with their Social Democrat partners - mainly over ministerial appointments. The coalition bickering had bordered on the farcical, with the leaders of Romania's two biggest parties accusing each other of not answering one another's phone calls and text messages.
"... 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."
Seven ministers resigned from the coalition on Wednesday, prompting Ponta to announce interim replacements. He will keep the Finance Ministry portfolio, which he took over in February on a temporary basis.
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 Basescu will step down after two terms in office. Previously, the coalition had planned to put up a Liberal candidate.
Romanian law makes the president's role largely ceremonial. But Basescu wields influence at key moments, since he has the power to veto a winning party's choice for prime minister after an election. He also has a big say in how Romania negotiates international agreements.
Ponta has repeatedly clashed with Basescu over a series of policy proposals, most recently the new fuel tax.
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.
Additional reporting by Paul Taylor and Luiza Ilie; Editing by Larry King