Sunday, March 01, 2009
By Heilean Rosenstock-Armie in Sibiu, Romania
It is 20 years since the revolution in Romania and the overthrowing and execution of Nicolae Ceausescu, but there is no talk of commemoration celebrations just yet.
The road to a full free-market economy was a difficult one for Romania. In the early years, the International Monetary Fund (IMF) refused loans to Romania, and the country left isolated - was brought to the brink of despair. Economic reforms labelled “shock therapy” took their toll on the population, as inflation reached 100 per cent in 1997.
People bartered, stockpiled, pawned or sold off everything to survive. Emigration soared, and remittances kept the country afloat. It is a chapter Romanians would sooner forget.
They were sold the promise that privatisation, liberalisation and a free market would bring prosperity. They gritted their teeth and stuck it out.
The promise seemed to be realised in recent years, and Romania had one of the highest growth levels in the EU last year, just under 8 per cent.
When I first visited Romania in 1999, there were no ATM machines, and few banks. There was little access to credit, and interest rates were unfavourably high, but then Romania sold off state banks and opened its doors to foreign financial institutions.
On a stroll yesterday, I counted 13 banks on one street in Sibiu, a city in the middle of Romania.
The banks included Italy’s Unicredit, Greece’s Piraeus bank, BCR, a Romanian bank taken over by the Austrian Erste bank group, and one of the largest players, Austria’s Raiffeisen bank.
Romanians were slow to trust banks - early loans were small, not excessive. A large swathe of the population changed the old windows in their homes and put in double-glazing.
If they took another loan, it went on central heating (having frozen for one winter too many).Then perhaps a car or a family computer. A few years ago, Romanians started to take out mortgages.
Foreigners also speculated and snapped up property. Prices rocketed. Banks were rash to lend, Romanians were eager to purchase a home and to consume as wages increased.
Property prices were always negotiated in euro, and Romanians were advised by banks to take out mortgages in euro or Swiss francs. But there was a snag: last year, one euro traded at 3.6Romanian lei; today it trades at 4.3 lei and rising.
Carmen and Cristi Sandru took the plunge two years ago to get a mortgage to build their dream home. Married with two children, they are both architects, and the boom in construction saw them reap the rewards. T he couple took a mortgage with Raiffeisen bank in Swiss francs. They borrowed 90,000 Swiss francs, the equivalent of €60,000.
Their monthly repayment in 2007 was 1,300 lei. Their monthly repayment now, with interest rate increase and the trading cost of the Swiss francs, is 2,200 lei.
When work stopped coming their way in late autumn, they assumed it was just the normal lull of winter but, as construction abruptly came to a standstill in Romania, they are now struggling to keep up repayments.
‘‘Our parents’ generation suffered severe poverty and hardship, but at least they did not have debt. It is the debt which is keeping us awake at night,” they said.
The global crisis was slower to hit Romania. Perhaps it felt cushioned, or perhaps recent parliamentary elections and a drawn-out debate over the budget and reform of the judiciary meant they forgot to keep their eye on the ball.
But now the signs are everywhere. The price of land has plummeted and houses that were being built with money sent home by Romanian immigrants abroad are lying abandoned. The money has dried up, as many of these immigrants - who mainly went to Spain and Italy - are now unemployed. Rows of cars and jeeps line up with “for sale” signs on their windscreens, as many who bought their cars on hire purchase can no longer make the repayments.
Two recent rating reports, from Moody’s and S&P, rated Romania in the “sub-prime zone”, and highlighting its vulnerability, finally made people sit up. The reports highlighted the risk of default on debt in foreign currencies, due to the depreciation of the lei, putting severe pressure on the parent banks in western Europe. They also predicted that growth would contract in Romania, as in the rest of eastern Europe, though estimates range from 2 per cent growth to zero and even negative growth.
Last week, Austria asked the EU and other institutions to assist the banking sector in the region of eastern Europe. A €24.5 billion package was announced last Friday by the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB) and the World Bank.
Austria has most exposure in the region, having lent some €250 billion. According to Raiffeisen Bank in Bucharest, the bank has lent some €2.67 billion in Romania alone. As such loans far exceeded local Romanian capital, the Romanian subsidiary has been supported with financial lines from Austria and the Raiffeisen Group.
Raiffeisen Bank Romania, which continued to have strong profits in 2008, anticipates a slowdown in lending and a focus on attracting deposits, to address its falling profits. However, the bank’s president, Steven van Groningen, speaking to The Sunday Business Post last Friday, stated that, though they had noted “a deterioration in the payment behaviour of the customers, it has not been dramatic enough to cause worry about serious defaulting”.
He believes that Romania “is resistant enough to face this period and to continue to achieve economic growth”. He adds that the bank has capital and that there are no liquidity problems.
The governor of Romania’s Central Bank, Mugur Isarescu, has also argued that Romania’s economy is sound and that it should not be put into the same category as other Balkan states. It raises the question whether current unease is justified. In a statement last Thursday, the Romanian prime minister, Emil Boc, said that the main focus for Romania was to shake off its current ratings.
He added that, because of its 5.2 per cent deficit, Romania was not in a position to access loans, other than those which came with strict conditions. It was with reluctance that Romania would soon seek IMF funding, following in the path of Hungary, Latvia and Ukraine.
He also outlined a strategy to speed up Romania’s entry to the eurozone before the target date of 2014, but critics in Romania see this as wishful thinking. The budget approved last week sees cutbacks and tax increases, but also emphasises spending on Romania’s weak infrastructure to continue to attract foreign investment and remain competitive.
The governor of the Romanian Central Bank, with his Hungarian, Polish and Czech Republic counterparts, stated that intervention was necessary to protect their floating currency regimes, which are all suddenly volatile. The European Commission has criticised such rhetoric, stating that it will add to market instability, but the governors were merely trying to relay the fears of their jittery citizens.
In announcing last week’s rescue plan, World Bank president Robert Zoellick made an emotional plea not to let Europe split in two again, and said it was time for all sides to come together.
Romanians hope that they will not be left out in the cold again - that, after the long road to EU membership, their neighbours will help them ride out this storm.