(Adds analyst comment, details)
May 16 (Reuters) - Standard & Poor's raised Romania's sovereign credit rating to investment grade on Friday, citing the European Union state's progress in lowering its external indebtedness.
S&P had cut Romania to junk roughly five years ago, at the height of a political crisis that led to the suspension of an International Monetary Fund aid deal.
"The upgrade reflects Romania's rapid progress in improving its external balances," the rating agency said in a statement.
"It also underlines our view that progress toward consolidating the fiscal accounts and bolstering financial sector stability will continue."
The leu and Romanian debt yields showed little reaction to the upgrade to BBB-/A3 from BB+/B with a stable outlook, as the decision was widely expected.
"Markets have recognised much earlier the solid rebalancing of the Romanian economy and, therefore, the decision is to a large extent already priced in," Romanian bank BCR said in a research note.
"However ... relative valuations suggest that there is still some downside potential for the yields of Romanian sovereigns."
Lower inflation, surplus market liquidity and higher-than expected economic growth have fuelled a rally in longer term debt in recent weeks. A five-year bond sale on Thursday was four times subscribed and secondary debt yields
Romania's economy grew 3.8 percent in the first quarter, beating expectations, while inflation is near a record low.
The country, which has a 4 billion euro precautionary aid deal from the IMF and European Commission - its third since 2009 - is rated Baa3 by Moody's and BBB- by Fitch Ratings.
Fitch returned Romania to investment grade in 2011 after cutting its rating to junk at the same time as S&P.
(Reporting by Ian Chua and Luiza Ilie; Editing by Catherine Evans)
((luiza.ilie@thomsonreuters.com)(+4021 305 5262)(Reuters Messaging: luiza.ilie.thomsonreuters.com@reuters.net))
Keywords: RATINGS ROMANIA/S&P
