Wednesday, January 21, 2009

Romanian president warns on "catastrophic" deficit

BUCHAREST, Jan 20 (Reuters) - President Traian Basescu on Tuesday warned Romania faced the risk of a "catastrophic" budget deficit this year unless social spending plans made before November's parliamentary elections are scaled back.

The European Commission on Monday said Bucharest could see its budget deficit balloon to 7.5 percent of gross domestic product and economic growth slow to 1.8 percent from some 8 percent in 2008.

"The European Commission's deficit forecast is correct if all the laws passed in 2008 are applied," Basescu said during a ceremony to appoint a new interior minister.

"If the 2008 laws apply, they will lead to a catastrophic deficit that will throw Romania into a formidable crisis and create macroeconomic imbalances that cannot be controlled."

Bucharest's month-old centre-left coalition government has pledged to slash its budget deficit to 2 percent from more than 5 percent projected for 2008, but has failed to convince economists that its planned spending cutbacks are sufficient.

Many say it faces the daunting task of taking back numerous pre-election welfare spending plans, particularly on pensions and wages in the public sector.

"The president is referring to the (planned) hike of 50 percent in teachers wages," said Ionut Dumitru, head of research at Raiffeisen Bank in Bucharest.

"If that law will apply, it is highly unlikely we will record a deficit of less than 5 percent this year."

Political observers warn such cutbacks could fan social unrest and lead to protests, similar to those erupting in other eastern European EU members such as Bulgaria, Lithuania and Latvia.
But without convincing changes in fiscal policy Romania risks seeing its economy unravel thanks to a sell-off on already jittery financial markets.

The leu currency has sunk to near record lows against the euro after shedding 7 percent in the first three weeks of 2009, while the Bucharest stock exchange remains mired near 5-year lows.
Two of the main credit rating agencies have given Romania the only sub-investment grade rating in the EU, underlining the economic vulnerability of the new member that stems primarily from its twin budget and trade deficits. (Reporting by Luiza Ilie and Marius Zaharia; Editing by Patrick Graham)

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