Thursday, March 5, 2009

Romania seeks IMF loan as Eastern crisis worsens

EurActiv.com
Published: Thursday 5 March 2009

Romania is holding talks with the European Commission and the International Monetary Fund to weigh up a possible loan, EurActiv Romania reported yesterday (4 March).

Background:

Many analysts see an IMF agreement as inevitable for Romania, given that it has similar capital account and budget deficits to those of new IMF-debtor nations Latvia, Ukraine and Hungary.

The IMF, the EU and World Bank agreed a $25.1 billion economic rescue package for Hungary last November. It was the biggest loan for an emerging market economy since the global crisis began.

In Latvia, the four-party coalition government collapsed last week and the prime minister stepped down, adding to the country's economic problems. The country had to take a 7.5 billion euro IMF-led rescue loan in 2008. The 7.5 billion euro package included financing from the EU, the Nordic countries, the Czech Republic, Poland, fellow Baltic state Estonia and the World Bank.

The IMF's share was 1.68 billion euro. Joaquin Almunia, the EU's economic and monetary affairs commissioner, recently expressed concern over the sudden fall of currencies in some of the EU's Eastern member countries.

The commissioner said he was worried about exchange rate volatility, referring to Poland, Hungary, Romania and the Czech Republic. Slovakia, in contrast, has already acceded to the euro, while the Bulgarian currency is pegged to the currency at a fixed rate and has thus not suffered yet.

"We will establish the amount when we will see all conditions. If we are not satisfied, we may not take it," Romania's Finance minister Gheorghe Pogea said about a possible IMF loan.

The authorities in Bucharest officially announced their decision to open talks with the IMF yesterday. Sources on 2 March had already confirmed that a Romanian delegation had flown to Washington for talks.

As recently reported (EurActiv 20/02/09), the Romanian national currency, the leu, has lost about 20% of its value in the past year. After hovering at about 3.5-3.7 lei to one euro from 2005 to late 2008, the Romanian national currency fell steeply in December 2008, dropping to 3.9 lei to the euro. In January 2009, the leu even touched its historical depreciation value of 4.3 lei to one euro.

Unemployment in Romania is set to grow to more than 5% this year, the government predicts, with thousands of layoffs in the automobile sector and other industries.

Romania's top banking official, Mugur Isărescu, said he was considering an IMF loan, but he did not say how much the country would seek. According to Ariel Emirian, vice-chief economist at Societé Générale in Romania, the country could need 4-6 billion euro in the event of an adjustment and external financial aid, and most of this amount should be directed towards stabilising the banking sector.

Emirian categorically stated that Romania is not in a situation of economic collapse and dismissed comparisons with the situation in Hungary.

IMF remedy could be poison for coalition

In Bucharest, the press is sceptical as to political stability of the recently formed government (EurActiv 15/12/08). The PDL (Democrat Liberals), close to President Traian Basescu, have the leftist PSD (Social Democrats) as a coalition partner, but the two parties are in fact traditional foes and the PSD is tipped to oppose cuts in state spending, analysts said.

"Given Romania's history of poor industrial relations, the government may struggle to impose budget cuts in practice, which suggests a somewhat strained outlook for relations with the IMF," the Royal Bank of Scotland's head Central and Eastern Europe analyst Timothy Ash is quoted as saying.

Eastern Europe crisis manageable

In the meantime, Erik Berglof, chief economist at the European Bank for Reconstruction and Development (EBRD), said Eastern Europe's financial crisis is "manageable" provided that Western banks continue lending to their units in the region, Bloomberg reported.

"The key is continued support from banks in Western Europe to their subsidiaries in the East," Berglof said in an interview yesterday in London. "As long as those flows continue, that's a very large part of the solution to the problem. The situation is manageable, but we must make sure that it is being managed."

Bloomberg also quoted analysts from JPMorgan, who said European banks may need to raise as much as 40 billion euro of additional capital by 2010, as a result of loan losses in Central and Eastern Europe.

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