Wednesday, November 5, 2008

Financial Crisis Leaves Romania Reeling

Dependence on Foreign Investment Bodes Ill for Once-Roaring Economy

By Craig Whitlock
Washington Post Foreign Service
Wednesday, November 5, 2008; A08

BUCHAREST, Romania -- In recent days, this once-booming country has been pounded by aftershocks from the global financial crisis. Speculators have attacked the local currency, the leu, betting that it would plunge in value. At one point last month, the stock market had dropped by 70 percent. By next year, some analysts predict, the jobless rate could double.

Like many of its East European neighbors, Romania is experiencing a sudden reversal of fortune. After years of record economic growth fueled by easy credit and heavy foreign investment, people here are bracing for a sharp slowdown that they hope does not turn into an outright crash.

Two of Romania's neighbors, Hungary and Ukraine, already have been forced to accept bailouts from the International Monetary Fund. Next-door Bulgaria, with a bulging current-account deficit, has troubles of its own. To the north, the Baltic states are also feeling a severe pinch, with consumers deeply in hock to stressed Scandinavian banks. The European Union, which many of the former Soviet satellite countries thought would bring them stability, hasn't offered much help.

"I'm afraid E.U. membership is not enough protection for Romania, Bulgaria and the Baltics," said Ilie Serbanescu, an economist and former government official. "The entire Romanian economy is in the hands of foreign companies. If the international situation is good, then it's no problem. But if the situation is not good, like now, we are in trouble."

Romanian officials have acknowledged some of their economic difficulties but said concerns about the country's stability are overblown. In an Oct. 22 speech, President Traian Basescu pinned the blame on "corrupt" outsiders.

"There were smart guys coming to Romania, who had studied at Harvard and Oxford, and they invented how to increase the value of one's shares without actually having money," he said.

Officials here have brushed aside talk of an IMF bailout, which would be a setback for a country that joined the E.U. just last year. They especially reject comparisons to Iceland, which has been hit so hard that bankrupt entrepreneurs are now looking for jobs as cod fishermen.

"I am sick and tired of comparing Romania to the Baltic states and Iceland. What do we have in common?" Mugur Isarescu, the governor of Romania's central bank, said in an interview. "This is the black part of globalization, the fact that you have all these ratings agencies and others putting together six or seven countries in the same boat."

At the same time, Isarescu and other officials said Romania has serious challenges to overcome.

The central bank has raised interest rates seven times in the past year. Last month, it was forced to intervene in the currency markets to prop up the leu, which traders were betting would collapse against the euro. "It was creating here a kind of panic," Isarescu said.

Romania plans to adopt the euro in 2014 but needs to meet a number of economic benchmarks before it can do so.

Romania's biggest problem is its current-account deficit: Far more money has been pouring into the country than going out. Much of the money comes from the estimated 2.5 million Romanians -- more than 10 percent of the population -- who work in countries such as Italy and Spain and send earnings back. But with those economies now suffering as well, many emigrants are expected to return home empty-handed.

The deficit has tripled in the past five years, making the Romanian economy vulnerable if foreign investors suddenly pull out.

"We were flooded with foreign capital after joining the E.U., and now it is drying up," Isarescu said. He said a slowdown in economic growth and devaluation of the leu could be good therapy for Romania in the long term -- but only if it happens gradually and in an orderly manner. "We have to prepare the country for a soft landing," he said. "In the morning, it is good to take a cold shower. I recommend it to everyone."

Private-sector analysts, however, have been predicting uncomfortable times. In a report last month, Goldman Sachs rated Romania the second-most vulnerable economy in Eastern Europe, after Hungary. And last week, the Standard & Poor's rating agency downgraded Romania's foreign currency credit rating to junk status.

Although the leu has stabilized in recent days, analysts said it is just a matter of time before currency traders mount another attack. "Based on history, these speculative attacks come in waves, so probably we're going to have more of these in the future," said Nicolaie Alexandru-Chidesciuc, a senior economist for ING bank in Bucharest. "I don't expect this to end here."

Since joining the E.U. last year, however, Romania has seen a surge in economic growth. Its gross domestic product jumped by 9 percent in the second quarter this year. Cranes crowd the skyline in downtown Bucharest, the capital. The streets are clogged with shiny new Dacias, a boxy sedan made at a plant owned by Renault, the French auto manufacturer.

Foreigners dominate the financial sector; three of the four biggest banks in Romania are based in Austria. In recent years, they were seen as a blessing. Consumers eagerly took out mortgages and car loans in currencies such as the euro and the Swiss franc, which offered much lower interest rates.

With the leu weakening, however, it has become more expensive for Romanians to pay off their foreign debts.

Bogdan Boca, 44, a radiologist from Bucharest, said he took out a loan of 20,000 Swiss francs, or about $17,400, two years ago to renovate a log cabin in the Transylvanian mountains. Now, he needs to work extra hours to keep up with his payments.

"It was the only way for me to take out a loan back then," he said. "I can't just give back the money, so I have to work more."

Many people are afraid to borrow money, slowing the real estate market and auto sales.

"People have stopped buying," said Bogdan Radan, a salesman at a Skoda car dealership here. "They expect that car companies should lower their prices very much and offer half-price or something."

Another worry is government spending. In recent years, Romanian lawmakers have been eager to lavish money on long-neglected public services, such as a promised 50 percent raise for schoolteachers. While such spending was affordable in good times, there are fears that politicians won't be able to cut back, especially with national elections scheduled for later this month.

"Our political system is not very well trusted," said Anton Vladescu, 66, an energy industry executive from Bucharest. "The influence of the election this year is very bad timing for the economy. The politicians will say and do anything to win votes."

Some analysts and lawmakers said the E.U. needs to provide more support to Romania and its neighbors to ward off a potential meltdown.

Daniel Daianu, a member of the European Parliament from Bucharest and a former finance minister, said central bank governors and finance ministers need to coordinate strategy. So far, he said, leaders of Europe's biggest economies -- Germany, Britain, France and Italy -- have been mostly talking among themselves.

"If there is a domino effect among the little guys, it could really affect the whole euro club," Daianu said. "We should be very, very cautious and not behave like we are an island of stability in an ocean of turmoil. There's an old Chinese saying: When elephants make love, you know what happens to the grass."

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