Thursday, March 19, 2009

Romanian leftists threaten to oppose IMF deal

BUCHAREST, March 18 (Reuters) - The Romanian ruling coalition's Social Democrats threatened on Wednesday to oppose a loan deal with the International Monetary Fund, raising concerns over the government's ability to defend the economy from crisis.

Last week Romania became the third European Union member after Hungary and Latvia to approach Brussels and the IMF for economic support, expected to total some 20 billion euros ($26.08 billion), to help it ride out global financial turmoil.

It is unlikely to back out of the deal, observers say, but the leftists' opposition could hamper negotiations over reforms needed to shore up Romania's budget and could undermine the government's ability to implement them effectively.

"This issue can trigger potential problems for the functioning of the coalition ... but we don't know how far this threat will go," said Sorin Ionita from the Romanian Academic Society think-tank.

At stake is Bucharest's ability to slash spending. This is vital to underpin wobbly financial markets, economists say, in the run-up to a presidential election in November or December that may pit the two government parties against each other.

Of the two coalition partners, the Social Democrats (PSD) are less fiscally conservative and have in recent weeks called on centrist Democrat-Liberal Prime Minister Emil Boc to boost social protection plans to offset economic pain.

On Wednesday, the PSD said it wanted to prevent any cuts in state pay and welfare, which the IMF may require as a condition for disbursing aid.

"There are several red lines we need to defend," PSD head Mircea Geoana said after a party meeting on loan talks. "If (our) conditions are not fulfilled, it is obvious we won't agree to this deal."

The two parties became unlikely partners after last November's parliamentary election, joining forces to form a broad coalition with the aim of strengthening the country's defences against global turmoil engulfing Romania.

Despite economists' concerns that policy differences between the two would prevent them from adopting urgent fiscal reforms, the government swiftly passed a 2009 budget plan through parliament and scrapped many pre-election spending promises.

But further cutbacks appear unavoidable as the Romanian economy slows sharply due to a shortage of cash and falling demand from its main trading partners in the West.

Many economists expect the economy to shrink this year after expanding faster than its peers in the EU in 2008, due to unchecked consumption and government spending that bloated its external imbalances and exposed it to financing difficulties.

The PSD's Geoana reiterated that despite his opposition to spending cuts, he wanted to ensure Romania sticks to its plan to join the euro in 2014. (Writing by Justyna Pawlak; editing by Mark Trevelyan)

No comments: