Tuesday, March 10, 2009

No meltdown if Romania aid deal but no quick fix

By Radu Marinas
BUCHAREST, March 10 (Reuters) - Any foreign aid granted to Romania to avoid a financial crisis will probably impose tough austerity measures on the EU's second poorest state and provide little long-term support for the leu currency.

Economists said any deal in response to Romania's request would calm fears of an immediate meltdown and could lead to a short-term market rise. But they said it did not remove the need for a fundamental depreciation in the leu or open up a way back to booming growth.

Few details of a potential plan have been made public, but a European Union diplomat source close to talks with the EU and the IMF said a deal could be decided very quickly if Romania agrees to its terms. An IMF team visits Bucharest this week.

Analysts say a joint deal may reach around 20 billion euros, near the amount Hungary took in its $25 billion IMF, EU and World Bank bailout last year or it could be as low as 9 billion.


While the size of any deal is still unclear, Neil Shearing, an analyst at Capital Economics, said $25 billion may cover almost all of Romania's external debt for the next year.

But it will likely come with conditions that exceed spending cuts in a government pledge to reduce the 2009 fiscal deficit to 2 percent of GDP from over 5 percent last year, a move praised by the IMF.

Because budget revenues are based on a growth estimate of 2.5 percent this year, seen as overly optimistic by economists, any aid could come with a demand for more spending cuts.

'The bailout package will not prevent Romania from entering a deep and protracted recession,' Shearing said.

'It would be wrong to assume - as many currently do - that a bailout package will allow Romania to revert to its recent pattern of development.'

Other analysts said a cash injection could still help ease a collapse in consumer demand, and that while it would still fall, the slowdown would be less severe than if no deal is reached.

ING (nyse: ING - news - people ) Bank Romania senior economist Nicolaie Alexandru-Chidesciuc said demands for more fiscal tightening would bring healthy economic growth in the medium term.

'It is positive news and it is good that the need for cash has been acknowledged,' Chidesciuc said. 'Without this money we would prolong our agony.'


Warnings from Romanian officials over the past month mean Bucharest's bailout request did not come as a surprise.

But although such a deal could also support the leu currency in the short term, evidence from Hungary, where the forint has lost 16.5 percent since it arranged its deal in mid-October, indicated the leu could still fall against the euro.

'It's likely to have a similar path as the forint,' said JP Morgan analyst Miroslav Plojhar. It's likely that when the central bank is not defending a specific level, the leu should weaken.'

Ivailo Vesselinov, EMEA economist at Dresdner Kleinwort, said that if markets judged the amount of any deal to be too small, they could quickly punish the leu and the prices of Credit Default Swaps, which are insurance against loan default.


While economists agree a bailout deal would help Romania, a success may also cement a trend in which the European Union approaches its troubled non-euro-zone members on an ad hoc basis, banishing any prospect of a region-wide umbrella.

On Tuesday, EU ministers were set to back a call from the International Monetary Fund to double its funds to $500 billion at this week's G20 finance ministers' meeting, with an emphasis on Saudi Arabia and China to pay a big part.

'EU leaders appear to be trying to outsource a lot of these decisions to the IMF and what could be very interesting as a signal would be the potential doubling of IMF funds to $500 billion,' Vesselinov said.

'It could be seen as the next best thing to a region-wide rescue package, and the IMF would again have to coordinate all of the individual deals. But at least its capital would be considerably bigger than what it is now.'

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