Wednesday, February 18, 2009

Romania may seek foreign aid

BUCHAREST, Feb 18 (Reuters) - Romania may seek foreign aid, possibly including an agreement with the International Monetary Fund to help finance short-term private sector debt, the central bank said on Wednesday.

Many economists believe Romania will have to seek funding from the IMF this year to prevent a financing crisis, in a deal similar to rescue packages sought by Hungary and Latvia in 2008.
Central bank officials did not give details as to what type of arrangement they would support.
Governor Mugur Isarescu said only that a package may be needed to "protect" hard currency reserves. He said the public sector does not have a financial gap and thus its impact on the leu currency may be "zero".

However, the private sector has the potential to enter a financial gap and the government may borrow more than needed to help financing the private sector.

"The idea is to cover the private sector financial gap with the help of loans from the public sector," he told a news conference.

"We are thinking of a package ... This could include current account money from the EU, investment money from the EBRD ... and funding from the Fund but only to protect the reserves."

Seen by many economists as one of Europe's most vulnerable economies, Romania went from the EU's fastest growing state last year to the only member with "junk" status for its debt.
This was driven largely by fast growth in private sector loans to finance rampant consumption in recent years and an expansive fiscal policy that rating agencies said gave insufficient protection to the overheated economy.

As a result its current account deficit went to 14 percent of gross domestic product in 2007 and about 12 percent in 2008.

Concerns have risen about Romania's ability to finance the external gap as foreign direct investments are expected to fall sharply. Analysts also said local banks may struggle to get access to funding lines from their foreign owners.

But Isarescu said most of banks' short-term debt, which accounts for about 10 billion euros of a total private foreign debt due this year of 24 billion euros, can be renewed.

"Roughly 9 billion euros of this (bank's debt)... has a very high probability of being renewed," he said, adding that it was unclear how much of the non-banking debt can be rolled over.

Public debt maturing this year stands at 1.6 billion euros, which Isarescu said could be larger depending on the budget deficit and government plans to rebuild an infrastructure development fund.

But he said public debt could be financed "at least partially if not all" through European Union's pre-accession and structural funds, or loans previously contracted.

Isarescu ruled out other state aid instruments for the private sector.
"The government sector needs to borrow more, this would be the solution, because capitalisations, nationalisations are rejected ... and even discussions about these are not welcome," Isarescu told a news conference.

Bucharest's centre-left government promised after the November parliamentary election to tighten fiscal belts and officials are considering IMF or EU loans.

Prime Minister Emil Boc said earlier this week that a decision may be reached in two weeks.
"No configuration (package) is ruled out but from the way things are developing, the IMF will probably be part of this configuration," deputy central bank governor Cristian Popa said.

Asked what type of agreement would be most suitable for Romania, Popa said: "I don't comment in any way." (Reporting by Luiza Ilie and Marius Zaharia; writing by Justyna Pawlak; Editing by Andy Bruce)

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