The recent performance of Romanian sovereign bonds is a timely reminder of the power of the bond market. It can punish — but also reward in equal measure.
Romania's rising debt and bulging deficits in the last few years have made its Eurobond spreads balloon, well beyond those of similarly rated sovereigns.
Fiscal policy became lax and the bond market took revenge, raising Romania's borrowing costs.
But since the election in spring 2025, Romania has implemented reforms to get its finances into better shape. The twin deficits, while still very high, are coming down.
The bond market has relented. Ten year euro notes are 230bp tighter than their election time peak in May last year. Romania's bond issue on Thursday came much cheaper than recent trades at the same tenors.
The bond market vigilantes have done their work — and it's welcome. Healthy government finances are good for everyone in Romania, or any other country.
The less Romania has to borrow the better, and the less it has to pay to do what borrowing it cannot avoid.
Lower funding costs free up cash for spending on schools, hospitals, roads and whatever else the government wants to spend money on. The politician’s holy grail of tax cuts could, a long way down the line, come into view.
Investors might like the high yields offered by countries in a weak fiscal position, but not too much. Bad fiscals can trigger a debt crisis, and no conventional investor wants a borrower to default.
But the bond vigilante can flex its muscles — ask Liz Truss and Kwasi Kwarteng.
Romania will rotate prime minster next year as part of its coalition pact and in 2028 there are elections.
Fiscal retrenchment generally isn’t a vote winner and politicians often make generous, and sometimes irresponsible, economic pledges to buy votes.
Romania — and the many other governments in developed and emerging markets also tackling worrying budget positions — must stay the course.
If they do, the bond market will smile. If they don’t, it will show its teeth, to the detriment of all.