Wednesday, October 29, 2008

IMF says no plans for rescue package for Romania

BUCHAREST, Oct 28 (Reuters) - The International Monetary Fund said on Tuesday it was not in talks with Romania about granting it financial help, but said its external environment was "very difficult".

Some economists have warned in recent days that Romania may have to seek outside help to shore up its finances and support markets, with the leu currency very volatile and blue-chip stocks falling 75 percent this year.

Romania's western neighbour Hungary has reached an accord with the IMF and the European Union on a broad economic rescue package to restore investors' confidence amid a global financial meltdown.

"We do not have discussions about such financial support underway in Romania, but we maintain a close policy dialogue with the Romanian authorities," the IMF said in a statement.

Late on Monday, Standard & Poor's cut Romania's foreign currency credit rating one notch to "BB+", putting it back at junk status with a negative outlook and citing a lack of policy response to mounting economic risks.

Despite such criticism, social spending has become a key issue in the electoral campaign ahead of Romania's parliamentary ballot on Nov. 30.

In particular, opposition parties have introduced a law mandating a 50 percent increase in teachers' wages, a move that has intensified wage demands from other public sector employees.
"Even before this salary increase became known, public and private financing sources were drying up," the IMF said. "In this setting, the initiative ... may need to be reconsidered."
The leu currency showed little reaction to the IMF announcement, holding slightly above the previous session's 10-day low hit after the S&P announcement.

However, analysts said the IMF statement was likely to add to longer-term pressures on the currency.

"Romania is an extremely vulnerable country and the idea of the IMF not considering a deal may hit the confidence further," said James Lord, emerging markets strategist at Standard Bank in London. (Reporting by Justyna Pawlak and Marius Zaharia, editing by Mike Peacock)

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