The government could approve the public debt management strategy on Friday. Romania has the second highest debt growth rate in the EU
euro money, Photo: Dreamstime
Romania has the second highest debt growth rate in the EU, increasing in the last 10 years by 245.9%, due to the increase in loans to finance the State's expenses. Prime Minister Bolojan admits that “we borrowed rapidly in the last 5 years. We have loans of over 200 billion euros, and the interest we pay is almost 3% of GDP”, says the prime minister.
On Friday, on the Government's table is the project regarding the administration of the public debt for the next two years, at a time when Romania has a huge financing need to cover: 259 billion lei in 2025.
“The interest we pay this year is approximately 55 billion lei, respectively 11 billion euros, and next year it will go to 12 billion euros. Of the 6.5% deficit, practically half is occupied only with interest payments. If we do not reduce them, no matter who will be in government in the coming years, these interest expenses, we have no way to escape from this rope, we will end up in a dead end.
The way Romania borrows – how much, when, in what currency, for which maturities and to which investors – directly influences the interest we pay, investors' confidence and of course, the country rating.
Romania has to roll over large and expensive debts
Romania has a debt portfolio with many short-term maturities. That means they have to constantly refresh loans at a time when interest rates are volatile.
The project of the Ministry of Finance clearly states: the risk of refinancing and the risk of increasing interest rates are Romania's main vulnerabilities.
In other words: if the markets get tense or if investors get nervous, Romania may be forced to borrow more expensively, even much more expensively.
Currency risk – a greater danger than it seems
A significant part of public debt is in euros, dollars or yen. If the lei depreciates, it automatically increases the amount in lei we pay for the same debt.
That's why the MF strategy insists on two things: maintaining a foreign exchange reserve to cover up to 4 months of the gross financing requirement and focusing on loans in lei, as much as the market allows.
Who lends us? Dependence on domestic investors has increased dangerously
The strategy shows important changes in the structure of investors:
Commercial banks: 44–45% of total government securities (up from 39.5% in 2023).
Pension funds: approx. 25%
Local asset management funds: ~25%.
Foreign investors: have dropped from 26% to ~20% in the last 2 years.
This dynamic conveys two major messages. First, that the domestic market took over the pressure of financing. The second is that foreign investors have reduced their exposure due to macroeconomic uncertainty, doubts about fiscal consolidation and political volatility.
When non-residents retire, banks and pension funds have to buy more government securities, which reduces liquidity in the economy and can push interest rates up.
Romania's rating – the biggest macroeconomic risk
The document says it explicitly: the downgrade risk is the most important risk for Romania. A downgrade below investment grade would have very harsh effects: higher interest rates for state loans, higher interest rates for the population and companies, institutional investors who would be forced to sell Romanian bonds and, last but not least, put pressure on the exchange rate.
