Tuesday, March 10, 2009

Romania next EU state to join rescue bailout list

By Radu Marinas

BUCHAREST (Reuters) - Romania asked the EU's executive for aid on Tuesday to save it from a possible financing crisis, making it the latest member of the bloc to cry for outside help against the global economic storm.

Its plea coincided with a signal by Hungary's central bank that it may have sold euros in the open market, boosting the forint and other currencies that have been battered since the global crisis hit emerging Europe last year.

All of central and Eastern Europe is scrambling to stop an evaporation of foreign funds that has caused Hungary and Latvia to grab International Monetary Fund-led lifelines, raised the risk of lending default, and sparked some public unrest.

Romania's finance ministry said it and the central bank had started talks with the Commission, the IMF and other institutions to seek "medium-term foreign financial assistance," code-language for a financial bailout.

It followed a call on Monday by President Traian Basescu for popular support for belt-tightening measures and an IMF loan.

An EU source familiar with the talks said an agreement could be reached very quickly.

"Negotiations will start very soon. When they are concluded will depend on conditions to be proposed for the aid package and whether the Romanian government accepts right away," the source said.

An IMF mission will arrive in Bucharest on Wednesday for two weeks. Mihai Tanasescu, Bucharest's representative to the Fund, said he saw a potential programme running at least two years.

The European Commission has pledged to help struggling economies in the bloc's eastern wing on an ad hoc basis. But lacking broad support, it has baulked at a wider plan to cover the region as a whole and has so far let the International Monetary Fund lead bailout packages. Such deals require austerity steps that are all the more unpopular because they cut state spending in countries already facing a collapse in growth.

On Tuesday, EU finance ministers backed a call from the IMF to double its crisis funds to $500 billion, with an emphasis that states like China and Saudi Arabia could pay a big share.

BELT TIGHTENING

There have been no details on a potential bailout but economists say it could amount to around 20 billion euros, near the $25 billion of IMF, EU and World Bank money agreed in a bailout of Hungary last October.

Romania's center-left government, however, may yet struggle to meet the IMF's requirements, bound to include tough spending cuts for the country of 22 million.

"A smooth process should not be taken for granted," Citigroup said in a report. "The mettle of the coalition government is likely to be tested by the difficult decisions ahead."

The leu, which has lost 18 percent since last summer but has been stable in recent weeks, edged up but still trailed gains of as much as 1.9 percent in the forint, the Czech crown and Polish zloty following the Hungarian central bank statement.

"We are also active in the market, which means we buy forints against euros, but as to when and how much, as to how much we did yesterday and whether we did anything at all or what we are doing today -- we have not commented on that and will not comment on it in the future either," Hungarian central bank Governor Andras Simor told TV2 televsion.

The bank said after a special meeting on Sunday it would start to channel EU funds into the market and was ready to use its entire tool kit to help the forint but it was not clear if Simor was referring to EU funds or an actual intervention.

Ratings agency Moody's also said emerging European states should not be treated as if pressures on their creditworthiness were uniform. Moody's sparked a region-wide sell-off last month after warning its banks could face ratings downgrades.

TENSION GROWS

After several years of booming growth, the 10 ex-communist states that have joined the EU since 2004 have been walloped by the economic crisis due to the dearth of foreign financing as well as a collapse in western demand that has hammered exports.

The assets selloff has cut up to a third off the value of floating currencies like the Polish zloty and put governments with units pegged to the euro under pressure to devalue, a move that would hit millions who took loans in euros and Swiss francs in the belief they would soon join the euro zone.

Social unrest, including violent protests in Bulgaria and Latvia, has risen in some countries, and the latter country's government was forced to step down last month. This week, officials in Lithuania tried to reassure the public after people rushed to buy foreign currency due to devaluation rumors.

In Estonia, the IMF backed Estonia's currency peg, but said it should aim to adopt the euro as quickly as possible, while Lithuania's prime minister said the litas would not stray from its peg, even if budget cuts were needed.

"In this context, our main objective is to secure the stability of the litas, and that we can do by securing the stability of our financial system," he said.

(Additional reporting by Nerijus Adomaitis and Krisztina Than; Writing by Michael Winfrey; editing by Patrick Graham)

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