UPDATE 1-Biggest party in Romanian coalition set to demand PM's resignation, political crisis looms

Romania's Social Democrats are widely expected to withdraw their support for Liberal Prime Minister Ilie Bolojan on Monday, likely ushering in months of political instability that will pressure debt, credit ratings ‌and the receipt of EU funds.

Bolojan's coalition government of four pro-European parties came together 10 months ago after a polarizing presidential election in an attempt to keep the surging far right from power but they have constantly clashed over reform measures. The leftist Social Democrats, the largest party in the coalition, have become increasingly alarmed at their loss of support to the far right, although Romania is ‌not due to hold another parliamentary election until 2028.

The Social Democrats, who despite misgivings have so far endorsed all the deficit-lowering measures, are expected to call for the resignation of Bolojan, ‌from the centre-right Liberal Party, in an internal party vote from 1400 GMT. As Bolojan has said he will not resign, the leftists would pull their six ministers from the cabinet later this week, leaving the coalition without a parliamentary majority.

Ratings agencies kept Romania on the last rung of investment grade after Bolojan's cabinet raised taxes and began cutting state spending to lower the European Union's largest budget deficit, but warned that political instability was a key risk. Failure to ⁠implement further reforms ​by August would mean Romania losing some 11 ⁠billion euros' worth of EU recovery and resilience funds, or roughly half of its total allotment from Brussels. It must also sign 16.6 billion euros' worth of defence contracts under the EU's new rearmament initiative SAFE.

PRESIDENT TRIES TO CALM ⁠INVESTOR NERVES Romania's centrist President Nicusor Dan tried to reassure markets on Monday, saying that the ruling parties were agreed about EU funds and deficit targets.

"Yes, we will have a political crisis, but in the essential matters ​we have predictability," Dan told reporters. Spreads on Romania's dollar bonds maturing in 2036 widened by 28 basis points to 256 bps in Monday trade from 228 bps on April ⁠15.

There was no immediate comment from ratings agencies Moody's, S&P or Fitch on the political developments. Eoghan McDonagh, a portfolio manager at Allianz Global Investors, said investors appreciated the Bolojan government's efforts to stabilise state finances.

"Any move away from this reformist ⁠path - ​ie Bolojan leaving his post - would be perceived negatively by the market, hence the recent move wider (in spreads)," he said. Bolojan, who opinion surveys show is the most respected politician in the coalition government, said late on Sunday he would appoint interim ministers from the existing cabinet, who can hold the redistributed portfolios for 45 days.

The opposition hard-right Alliance for Uniting Romanians, which currently dwarfs ⁠all parties in opinion surveys, could file a no-confidence vote in the coming weeks, as could the Social Democrats. If the two parties back the vote, the government would fall, ushering in ⁠weeks of protracted negotiations between the parties to form ⁠a new coalition.

A pro-European governing majority cannot exist without the Social Democrats, the largest party in parliament with 28% of seats. President Dan, who nominates the prime minister, has said the four coalition parties have no choice but to keep governing. He has ruled out appointing a premier backed ‌by the far right.

Romania has ‌never held a snap parliamentary election.