The cost of insurance against the non-payment risk for bonds issued by the Romanian state has surged after Fitch's decision to downgrade its sovereign rating by two notches - coming close to the highs reached in October, when international financial markets were in turmoil.
Foreign insurers were asking a 575 (5.75%) basis points premium yesterday, that is 57,500 dollars to insure for five years one million dollar worth of bonds issued by Romania, after the premium fell to 400 basis points a week ago.
The all time high was reached on October 23, when the premium had gone up to 650 basis points, according to the data aggregated by Bloomberg.
Such instruments used to cover non-payment risks and called CDS (Credit Default Swaps) are issued by most international financial institutions with a worldwide presence. Investors that buy a bond can also buy CDS to cover the risk taken, but this entails an additional expense that diminishes their profit. Having to put up with a higher cost, investors demand higher yields. For instance, the 750 million-euro bonds issued by the Romanian state in June at a 6.69% annual yield are now traded at annual yields of 12%.
"Foreign investors remain interested in the Romanian eurobonds, due to the high level of yields they generate," says Ionut Dumitru, chief economist of Raiffeisen Bank Romania.
The raise in CDS for Romania reflects a deterioration of the perception of foreign investors on the state's ability to pay its debts.
The current raise also occurred as a result of a dwindling appetite for emerging markets in the region. After all, at the end of October, when Standard & Poor's downgraded Romania's rating, the CDS policies continued to go down, reaching a low of the past month last week.
Such levels put Romania among countries like Vietnam and Iceland. On the other hand, the insurance premiums as
