Thursday, January 29, 2009

RPT-Romania in talks with EU on potential rescue loan

Thu Jan 29, 2009 11:47am GMT

By Radu Marinas

BUCHAREST, Jan 29 (Reuters) - Romania has started talks with the European Commission on a potential rescue loan to shore up its budget as it struggles to prevent a financing crisis due to lax fiscal policies and a sharp economic slowdown.

Many economists warn the new EU member state may be the next in line to seek financial aid, following several of its eastern European peers, as the global crisis cuts off sources of cash.

An EU delegation arrived in Bucharest this week, parallel to a regular mission from the International Monetary Fund, and talks on EU aid were likely after Romanian President Traian Basescu said this week a 6-7 billion euro loan may be needed.

"A mission of experts from the Commission is in Bucharest. They will discuss macroeconomic stability and probably they will talk about the possibility of giving Romania financial support," Nicolae Idu, head of the EU delegation in Bucharest, told Reuters.

"President Basescu ... has discussed (with the EU Commission) the possibility of getting European financial aid worth 6-7 billion euros. This discussion is now initiated."

Diplomats say Brussels may insist any EU loan is part of a joint plan together with the IMF, because of concerns over Romania's ability to tighten budget strings and clean up its loose fiscal policy.

But Bucharest's new centre-left coalition government, in power since November's parliamentary election, has so far been reluctant to seek help from the IMF, with Basescu saying this week he might oppose it, likely because of concerns over any stringent conditions imposed by the Fund.

The IMF has said a rescue package is not on the agenda of its mission this week.

The government faces a dilemma this year because loose fiscal policy may spook financial markets and trigger a financing crisis but the economy could slide into recession without additional cash.

Diplomats also warn about social discontent likely to be triggered by budget cutbacks as unemployment is on the rise with production cutbacks and extensive layoffs.

There have been no mass protests in Romania so far, in contrast to its southern neighbour Bulgaria where riots broke out earlier this month as fears of economic pain and anger over poor policy-making reached boiling point.

But powerful trade unions are already threatening to go on strike in Romania, and wage freezes and spending cuts similar to those in Hungary and Latvia, which have received EU-IMF rescue packages, could spark protests. (Reporting by Radu Marinas; Writing by Justyna Pawlak; editing by Stephen Nisbet)

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