Monday, February 9, 2009

Romania minimum reserves cut too soon-cbank

BUCHAREST, Feb 9 (Reuters) - Romania has cut the minimum reserve requirement for banks' leu liabilities too soon, flooding the market with liquidity and putting weakening pressure on the leu currency, central bank Governor Mugur Isarescu said on Monday.

The central bank reduced the reserve cap for leu liabilities to 18 percent from 20 percent in October. Its threshold for hard currency liabilities stands at 40 percent .

'I, who voted in favour of the cut, can tell you that it was a wrong move,' Isarescu said during a meeting with the finance minister and commercial banks. 'We have cut too soon.'

The cut, which Isarescu said was based on the assumption of a 'reasonable' budget deficit, boosted leu liquidity, forcing the central bank to sell euros to temper the unit's fall.

Adding to currency pressures, loose fiscal plans have boosted the budget deficit to over 5 percent of gross domestic product, contributing to a vast current account deficit, which makes Romania one of the most vulnerable EU economies.

Dealers and economists have said in recent months they suspected the central bank intervened sporadically as economic concerns and uncertainty over fiscal plans weighed on the leu.

Economists have repeatedly said the central bank should lower reserve requirements -- among the highest in the European Union -- which they say would unblock lending, all but frozen as banks see access to funding from their foreign owners drying up.

But central bankers have countered that prudent measures have helped to ward off a crisis in the banking system.

Romania is seen as particularly vulnerable to a funding shortage in eastern Europe because of its high reliance on foreign cash to plug a yawning external shortfall. Two ratings agencies have put its debt at 'junk' level.

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