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Claudia Ciobanu

ROMANIA: Pushed by Crisis Into Dubious Borrowing

by Claudia Ciobanu

9 April 2009

The Romanian government is borrowing close to 20 billion euros from international financial institutions in order to stem the effects of the global financial crisis. But few in the country seem to know precisely how the money will be used and whether it will have a more positive than constricting effect.

The International Monetary Fund (IMF) announced Mar. 25 it would grant a loan of close to 13 billion euros to Romania. The country is to receive another 7 billion euros from other lenders, such as the European Union (EU), the World Bank (WB), and the European Bank for Reconstruction and Development (EBRD). The money is expected to come in over the next two years. Romanian authorities have negotiated to repay it by 2015, at an interest rate of 3.5 percent annually.

After Hungary, Belarus, Ukraine, Latvia and Serbia, Romania becomes the sixth country in Eastern Europe to borrow money from the IMF in order to tackle the effects of a financial crisis that originated in the U.S. and Western Europe, and spread eastwards thanks to the economic liberalisation intensively promoted in the region since 1989.

Neighbouring Bulgaria - considered as vulnerable as Romania in the face of the financial crisis - has postponed signing such a deal. Although poorer than Romania, Bulgaria has run much smaller budget deficits, and its currency is kept stable by a Currency Board established after a major financial collapse in 1997.

Romanian President Traian Basescu has said the loan is "a preventive deal taking into account what could happen in the future."

The global financial crisis has taken its toll on the Romanian economy, which has grown mostly on the basis of increased consumption over the past decade. The threat of redundancy looms large, in both the private and the state sectors. The housing market has slowed down, and many construction sites for apartment buildings and luxury residential complexes have been left abandoned. Romanian producers have also been hit, since the major trading partner of the country is the rest of the European Union.

The banking sector, made up mostly of Western European banks, has become reluctant to give out loans. This is the main purpose for which the IMF money is to be used, according to official statements. The idea is that IMF money would allow the National Bank to soften requirements on reserves to be deposited by banks for the credits granted, in turn making them more inclined to public lending.

Currently, commercial banks are required to deposit in the National Bank reserves representing 40 percent of the value of loans in foreign currency and 18 percent for loans in the national currency. Following the IMF deal, Mugur Isarescu, governor of the National Bank, declared that the reserve requirements would be reduced "very gradually", and "starting with those for foreign currency, where the market is less active."

The billions borrowed by Romania are additionally supposed to help stabilise the national currency. "Romania is much more integrated in the European and global economy today than ever before," economist Constantin Colonescu from the American University in Bulgaria told IPS. "A depreciation of the currencies in the countries which have still not adopted the euro (like Romania) would cause a chain reaction, negatively affecting trade between these countries. The IMF decision to provide this money for Romania takes into consideration the larger picture, rather than only Romania’s specific situation, and this is how we can account for the very big amount granted."

While the IMF deal is usually considered, both in Romania and at the EU level, a necessary boost to help the country avoid a deep recession, some doubt whether the loan is appropriate.

One of the criticisms brought against the IMF deal is the sparse information on the conditions Romania agreed to. "The Romanian authorities should publicise in detail the conditions accepted by the country," wrote economics editor Daniel Oanta in national daily Cotidianul Mar. 31. "If we want to have national solidarity in the face of the crisis, we need transparency."

A bone of contention which became obvious during the negotiations with the IMF was the demand of the Romanian Social-Democrat Party (PSD), a member of the governing coalition, to protect the population from immediate social costs as a result of the deal. PSD insisted there should be no cuts in salaries and no redundancies in the public sector, of the sort that have been the immediate consequence of IMF loans to various countries.

"The programme contains explicit provisions to increase allocations for social programmes, as well as protection under the reforms for the most vulnerable pensioners and public sector employees at the lower end of the wage scale," said the IMF press release announcing the deal.

But the picture is perhaps not that rosy. "Probably one of the conditions of the deal is not to decrease the incomes of state employees - but neither to increase them, so as to contain the budgetary expenses," said Colonescu.

Trade unions, pensioners and students have already started negotiating with the authorities to prevent redundancies and cuts in incomes, that had been predicted by analysts and politicians in light of the crisis and the loan. The government agreed to only cut bonuses and not salaries, and even to increase by 15 percent the scholarships granted to good students.

It remains unclear whether the IMF deal will bring to Romania the cushioning it needs against the global financial crisis, especially if the government does not pursue a coherent anti-crisis strategy. The political leaders themselves seem uncertain of the consequences of the IMF deal.

In a public statement Apr. 1, Mircea Geoana, president of the Senate, expressed hope about the positive effects of the credit, but only "if the money is managed properly."

Published by IPS

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