Wednesday, August 12, 2009

AFP: Crisis-hit Romania gets relief with IMF, bank deals

(BUCHAREST) - Romania's crisis-hit economy was given a breathing space on Monday after a deal with the IMF on a key bailout package and an agreement by European banks to keep assets in the country.

"We have come to an agreement on what has happenend and what needs to happen," the head of the International Monetary Fund's mission to Romania, Jeffrey Franks, told a news conference at the end of a 10-day evaluation trip.

The agreement now has to be put to the IMF's executive board for a final decision, Franks said.

"Once our board has made its final decision, then additional resources will immediately become available."

The IMF is putting up 12.95 billion euros (18.38 billion dollars) out of a 20-billion-euro bailout package in conjunction with the World Bank and the European Union that was finalised in May.

Romania has already received 5.0 billion euros of the IMF money and the latest talks concerned a second instalment of 1.9 billion euros.

Romania entered recession in the first three months of this year when gross domestic product (GDP) shrank by 4.6 percent on a quarterly basis.

An even sharper contraction is expected in the second quarter and the Romanian economy is projected to contract by 8.0-8.5 percent in 2009 as a whole, Franks said.

Nevertheless, Romania could return to "modest growth" in 2010, he added.

Franks also said the IMF acknowledged that Bucharest's budget deficit would widen to 7.3 percent of GDP instead of 4.6 percent as originally expected with the government facing increasing difficulty in paying public sector wages and pensions.

"We have agreed that a portion of our disbursement could be used for budgetary financing," Franks said.

But he insisted Bucharest would have to take measures to cut spending in the medium and longer term.

In a joint statement issued in Brussels, the IMF and the EU said that the European parent banks of the nine largest foreign-owned banks in Romania had all committed to maintaining a solid presence in the crisis-hit country.

The banks concerned -- including Eurobank, National Bank of Greece, Societe Generale, Volksbank and UniCredit Group -- represent 70 percent of Romania's banking market and are therefore key to the EU nation's financial recovery.

The foreign-owned banks had signed commitments to maintain a relatively strong capital to risk ratio to help firm up the country's financial system, the statement said.

"The success of Romania's macroeconomic reform program and the sustainability of its balance of payments depend significantly on the continued active involvement of foreign banks in Romania," the IMF and EU said.

Earlier this year there was a high level of concern among some ratings agencies and other observers that there could be a new twist to the global economic crisis coming from misfiring banks in Eastern and Central Europe.

Romania's credit ratings were particularly under threat amid fears that foreign banks would give up on their investments in financial institutions in the region. Agreements like this have helped to ease those fears.

Under the agreement announced on Monday the parent banks will boost the capital of their subsidiaries "to maintain a 10 percent capital adequacy ratio," the EU and IMF said in their statement.

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