After the Romanian government unveiled a surprise plan to bring in about 10 billion lei ($2.5 billion US) in extra revenue, Romanian stocks plunged and bond yields spiked the most in over three years, according to Bloomberg. To fix a budget deficit that could push the country beyond critical EU thresholds, Finance Minister Eugen Teodorovici presented a package of changes targeting ways for the country to bring in more revenue. The changes are supposed to begin in 2019 and include a tax on the banking industry, which is dominated by foreign players.
It would also include new taxes on energy and telecommunications companies, in addition to capping natural gas prices. The plan also revamps a once proposed initiative to make massive changes to the retirement system in the country.
Needless to say, the markets didn’t like this proposal, with the Bucharest exchange’s BET Index plunging 11.8%, its biggest fall since 2009. Additional asset classes also saw extreme volatility. The 10 year yield jumped over 30 basis points at one point and the country's currency, the leu, was weaker by 40 basis points. One of the biggest foreign bank operating in the country, Raiffeisen Bank International AG, was down 3.4% during trading in Vienna.
The country's president, Klaus Iohannis, in conjunction with large businesses, urged the government to slow down before acting and called the new slate of proposed changes "hasty and illogical".
Iohannis said the plan "clearly shows there’s a problem with the budget. The conclusion is they don’t have money, they don’t know how to get it and they’re making up all sorts of taxes on the spot."
The additional revenue would offset many of the fiscal giveaways that have occurred under the regime of the ruling Social Democrats, including higher state salaries. The proposed slate of changes echoes moves made in countries like Hungary that similarly catalyzed shock and volatility in its investment markets.
A part of the plan that includes levies on banks assets, dubbed a "tax on greed", could generate 3.6 billion lei next year. It would also help protect citizens from higher loan repayment costs, as it will kick in if interbank rates go above 1.5%.
Erste Group Bank economist Eugen Sinca said:
“The timing -- with a few days before going live at the beginning of 2019 -- the extent and the size of the measures taken together are deemed to have a seriously disruptive effect on the financial system as well as the energy, utilities and telecom markets".
Despite the unrest and turmoil the proposed changes have created, Romania gets credit for at least trying to "take the medicine" and make sweeping changes to correct its deficit - something we'll likely never get around to fixing in the United States.