Monday, February 23, 2009

Romanian cbank joins regional ranks to defend leu

BUCHAREST, Feb 23 (Reuters) - Romania's central bank vowed on Monday to counter any "destabilising" currency falls and said current depreciation did not match economic fundamentals, joining other regional rate-setters in an effort to boost market mood.
Speaking at the same time as his counterparts in Hungary, Poland and the Czech Republic, central bank governor Mugur Isarescu said excessive weakness threatened to destabilise the region's economies.

"The central bank is ready to act," Isarescu said.
The leu has fallen sharply against the euro this year in line with other currencies in the region, as investors fled local markets on fears of deep economic problems and a potential financing crisis in Romania.

Earlier this year, it hit a record low of 4.3530 per euro , compared with 3.0870 hit in July 2007. It fell briefly following the central bank comments to around 4.2700 but later gave back some ground.

In a sharp reversal of fortune, Romania has shifted from being the fastest growing European Union member last year to one seen as the most economically vulnerable, largely due to worries over its ability to finance a vast current account deficit.

At 12 percent of gross domestic product last year, its external deficit was one of the largest in the EU, although smaller than Bulgaria's astounding 24-percent shortfall.
Isarescu argued a growing perception among foreign investors of economic risks in eastern Europe may have a destabilising effect.

"There are regional risks, when the central and eastern Europe is treated by some reports as the sub-prime of Europe. Even though we are in a position to have all the data that shows this is not true, the perception is created and must be addressed as a risk," Isarescu said.

The Romanian central bank was the last in the region to start cutting interest rates in recent months as it worried that lower borrowing costs could reignite stubborn inflation.
It widely overshot last year's price growth goal when December inflation hit 6.3 percent, compared to its target range of 2.8-4.8 percent. Its key rate is now at 10 percent, following a quarter-point cut in February.

Stubborn price growth, while boosted earlier in the year by high fuel and food costs, was driven primarily by strong domestic demand as Romanians consumed voraciously to boost their living standards and companies raced to modernise.

In the process, many racked up foreign debt that now threatens to destabilise the economy as global cash sources dry up.

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